By Kymberly Martin
Yields closed up 3-4bps across the NZ curve yesterday. NZ 2 and 5-year swap closed at 3.56% and 4.46% respectively.
Based on our current OCR projections, ‘break-even’ levels for 2 and 5-year swap sit around 3.60% and 4.20% respectively.
We therefore continue to see 5-year as the relatively ‘expensive’ point on the curve for paying. However, there is natural flow to this part of the curve given it is the longest point that many businesses are able to ‘fix’.
Yesterday’s PPI data confirmed that an inflationary pulse is building in the NZ economy. In fact PPI surprised hugely with a 2.4% rise in Q3 to take the annual rise to 4.1%. It confirms that NZ is starting to stand out on the global front both in terms of real growth and simmering inflation pressures. Rate hikes will not be too far away. The market continues to price a first OCR by early next year.
By contrast, the market continues to price around a 30% chance of a further 25bps rate cut from the RBA by mid next year.
Overnight, US data showed a solid advance in October retail sales (0.4%m/m) but core inflation data that remains contained at 1.7%y/y. Inflationary pressures are not a current concern for the US Fed as it continues its highly accommodative policy stance. This will remain the case even once ‘tapering’ eventually gets underway.
Overnight Fed member, Bullard, suggested tapering was “on the table” for the next meeting.
However, Bernanke and Yellen’s recent comments suggest a start to tapering is likely further off.
US benchmark 10-year yields traded between 2.69% and 2.74% overnight, sitting mid this range, above 2.71% at present.
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