By Kymberly Martin
It was once again a quiet day in NZ swap markets with yields closing unchanged. However, NZ bonds were bid from the open following moves offshore. NZ bond yields closed down 4bps across the curve.
The yield on NZ 10-year bonds now sits at 4.68%, still mid the 4.50-5.00% range we see holding in the year ahead. We see constrained NZGB supply and range-bound US 10-year yields limiting the sell-off in NZ long-bonds that would otherwise occur as the OCR rises next year.
The market now prices around 100bps of OCR hikes by the end of 2014. There are few obvious domestic catalysts on the horizon in coming weeks to change expectations.
A knock to expectations near-term would likely need to come from (i) a negative global shock (ii) a surge higher in the NZ TWI (iii) signs that the RBNZ’s LVR restrictions are biting much harder than expected. In this regard, housing data such as today’s RBNZ’s weekly mortgage approvals will remain closely watched. However, there appears a growing recognition that LVR restrictions are, to an extent, a ‘side-show’.
As the NZ economy more broadly builds a head of steam a monetary policy response will soon be required from the RBNZ.
Strategically, we continue to see higher yields ahead. Near-term, NZ 2-year swap appears bound in a 3.40%-3.60% range. The top of this range may not be broken until we move into next year and closer to the start of the OCR hiking process.
Overnight, benchmark US and German 10-year bond yields drifted higher. US yields crept up from 2.66% toward 2.70% while German equivalents rose from 1.68% to 1.72%.
Today we expect NZ Q3 PPI to show a 1.1%q/q rise in output prices. This would push annual inflation to 2.8% from 0.8%, adding further evidence to the story that NZ inflation is now on an uptrend. This will require a response from the RBNZ next year.
Tonight the Bank of England releases its minutes and the US October CPI, retail sales and Nov 15 mortgage application are released. US CPI should confirm that inflation is not yet an impediment to the Fed running ultra-accommodative policy.
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