By Kymberly Martin
Yesterday morning’s US FOMC created significant volatility offshore.
NZ swaps pushed another 4-5bps higher.
NZ bonds also closed up 3-5bps.
The US Fed finally delivered with $10b worth of tapering, beginning in January. Further tapering will be announced in “measured steps”.
However, the Fed also emphasised that rate hikes were still a long way off. In an amendment to previous statements it said it would keep the Fed funds rate low “well past” the point where the unemployment rate falls to 6.5%.
US 10-year yields traded a 10bps range within minutes of the announcement as the market attempted to distil the consequences.
Yields then settled around 2.88% until the early hours of this morning when yields pushed on up to 2.94%.
Domestically, NZ swaps pushed higher on the day, assisted by positioning and continued strong domestic data.
Yesterday’s Q3 GDP came in above expectation at 1.4% (1.1% expected). NZ 2 and 5-year swap ended the day at 3.83% and 4.71% respectively. The 2-10s swap curve remains fairly stubbornly at 146bps.
We anticipate a flattening to unfold next year as OCR hikes get underway.
Post the GDP release the market now prices almost a 50% chance of a 25bps rate hike in January.
We believe this pricing is too stretched. In order to be consistent with previous communications, we believe the RBNZ will use the January meeting to set up the prospect of a first hike in March.
The market now fully prices 125bps of hikes by the end of next year. This is our central view, although see the risks tilted toward more, rather than less, hikes.
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