Despite LVR restrictions being the equivalent of a 30 bps hike in the OCR the RBNZ reiterated its forecasts for the next 2-years in its latest Financial Stability Report

By Kymberly Martin

It was a bit of a busier day in NZ markets but with the end result that NZ swaps closed down 1-2bps while bond yields closed up 1bps. Overnight, US 10-year yields slipped from 2.76% to 2.73%.

Yesterday’s  Financial Stability Review suggested that recent housing data, while mixed, is not providing any hard evidence that recently implemented LVR restrictions are having greater than expected impact. The RBNZ reiterated that the OCR will likely rise by 200bps in the coming two years, despite LVR restrictions (themselves seen as equivalent to 30bps of OCR hikes).

The market currently prices a 75% chance of an OCR hike by March next year and around 105bps of hikes by the end 2014.

We see the OCR 125bps higher by the end of next year and 200bps higher by 2H 2015. We see balanced risks around our forecast for a start to the rate hiking cycle in June next year. Our expectation for a sustained NZD strength is the reason we do not forecast an earlier start. We see upside risk around our forecast peak in the OCR, of 4.50%.

Overnight, in the backdrop of modest declines in equities, US 10-year yields drifted down from 2.76% to 2.73%.

Today, the NZ DMO will auction $200m of NZGB2020 bonds. The DMO continues to target this most recent maturity where only $3.5b is currently outstanding compared to $9-$11b of more established nominal bonds. We anticipate good demand at this week’s tender in line with that seen at the previous auction three weeks ago.

Today NZ retail sales and the BNZ PMI will be released, both which should confirm current broad-based positive domestic activity.

Offshore, Japan delivers Q3 GDP today. Tonight, Fed Chairman Bernanke is scheduled to speak. However, the market will be waiting with greater anticipation for the incoming Chairman Yellen to speak at her nomination hearing on Friday night.