Inflation expectations still too high for RBNZ to feel complacent

By Kymberly Martin

Markets were virtually unchanged yesterday. NZ 2-year swap continues to sit just above mid-range, at 2.76%. The market prices the RBNZ’s Official Cash Rate will be little changed in a year’s time.

By this time next year we expect the gradual process of rate hikes will be under way

Still, the week ahead is relatively sparse of local data to impact market pricing. Today’s Q3 RBNZ 2-year inflation expectations data will be of interest. Expectations have fallen from a 3.0% peak at the end of last year, to 2.4% in Q2.

This is still too high for the RBNZ to feel complacent. However, the data is generally not a big market mover. NZ markets will likely take their cues from offshore moves this week.

Thursday’s NZ DMO auction will also be important for bonds markets given tepid demand seen in recent weeks.

As highlighted at the end of last week, the NZ 2s-10s swap curve has steepened to a point (119bps) that we would begin to take profit on a steepening trade. If we reach fundamental ’fair value’ above 130bps we would look to reposition for outright flattening.

After their recent steep sell-off, German and US ‘safe haven’ bonds appears to be finding some support. US 10-year bond yields failed to maintain a break above 1.85% overnight, now back at 1.81%.

Tomorrow night’s FOMC meeting minutes will be scoured for any shifts in sentiment toward further quantitative easing. Ahead of this, aside from European headlines, there is not too much to drive direction of global ‘safe haven’ bonds. Further rises in their yields would ultimately suggest further NZ curve steepening.