By Kymberly Martin
NZ swap and bond yields closed a fraction higher yesterday. Overnight, offshore ‘safe haven’ bonds continued to consolidate near top of ranges.
The market continues to take out ‘insurance’ against the chance (15%) of a RBNZ cut by mid-year. However, the market prices a 20% chance of the OCR being 25bps higher by year-end.
We expect a 25bps hike in December, with the OCR gradually being moved back to ‘neutral’ thereafter. We see the OCR at 4.25% by end 2014.
Overnight, US yields traded with some volatility, responding to data releases on both side of the Atlantic. Overall, US 10-year yields continue their recent consolidation near top of ranges traded for the past 6 months.
10-year yields currently sit around 1.84%.
In recent weeks, as NZ short-end swap yields have crept higher, AU equivalents have remained depressed, reflecting expectation of RBA rate cuts ahead. This has taken NZ-AU 3-year swap spreads, to -8bps, close to its highest level since 2009.
In the year ahead we expect this spread to move well into positive territory as the RBA cuts by up to 75bps while the RBNZ eventually raises rates.
Today’s AU CPI data will be a critical data-point in the lead up to the 5 February RBA meeting. A low-side reading (consensus expects 2.4%y/y trimmed mean) raises the chances of a cut at the meeting. The market currently prices a 35% probability of a cut in February.
There are no NZ data releases today. The next domestic data release will be tomorrow’s BNZ PMI.
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7 Comments
Your dream (of rising rates) is of course others nightmare. To me if its going up then we will be recovering strongly and will be cutting off a noticable inflation trend. So sure you will have more income but after tax and inflation will you be any better off? I really wonder. Food costs for instance I think is being held down by ppls inability to pay, so I think food will jump a lot if we are expecting an OCR of >4% so you could be NET worse off.
NB banks have been wrong for the last 4 years and circumstances have not only changed but got worse. If I'd listened to them in the last 4 years I would have fixed and it would have cost me thousands....
To get inflation personally I think we first need to see un-employment drop as demand sees employers take on staff, then wages will rise, then ppl can spend more. We could get a recovery with no change in employment but then ppl wont have money to cause inflation/recovery.
This is why I think banks fall flat on their face, they dont look and understand how real ppl are doing, hence the crazy projections.
regards
Unemployment is likely to stay high for some time maybe another 3 years, and the commodity cycle although has some legs at the moment is likely to faulter in the second half of the year when the Kiwi will weaken after peaking out at 88 or 89 cents on the US dollar. The sting in the inflation numbers this year could well be the issue over Iran which could cause the oil price to sky rocket adding a dampner on consumer confidence with high gas prices in 2013. I suspect gold and Silver will have a strong rally. I suspect the OCR will go up as the Kiwi as a currency weakens. At the moment New Zealand has been shielded from from inflation due to the strong currency, but if the kiwi was to significantly weaken we would soon all feel the pain of higher inflation and higher costs and increasing OCR to tame inflation. This could lead to slower consumer spending, reduced appetite for mortgages.
OCR won't be going anywhere for years to come. If we get an oil shock due to Iran/events then that will act as brake enough - adding an OCR rise on top of petrol prices to $2.90 will kill the economy.
We already have decreased consumer spending, slightly rising unemployment, provincial centres decline, increased saving/debt repayments by households, nil job creation outside of Chch. It will be very difficult to increase OCR under current conditions.
Of course there will be other major events in 2013 with effects: e.g. another major earthquake/volcano in Auckland, Taupo? A growing Islamist militancy shutting down oil fields? EU gaining global monetary control. Japan, Britain & Israel will all suffer from being the scapegoat in their respective regions. Australia will be scrambling to avoid recession - further cutting OCR. Insurance companies going broke from covering natural events.
OCR rises in this environment?
Hmmm.
MB appears to be a 'suck-em-in' tout.
MiA has never caught on.....
So what happens when oil-constraint (blame it on things if you must, but Iran wouldn't be pivotal if the others weren't taps-open) permeates beyond the discretionary , and starts to scarcify food, water, shelter (oops, it does already) and health? Essentials, in other words.
So there's a bidding war over essentials. The rich out-last/out-bid the poor - or do they? Nobody is going to accept debt as equity, at that point. Are they going to continue to accept stored binary proxy? Cash? Gold? Regardless, whatever the proxy, it'll suddenly be worth less as the bidding and the scarcity ramp.
But there will be less happening - so that's stagflation, right? (does it affect women too?)
What happens to the OCR in a - permanent - stagflation scenario?
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