Wheeler comments set scene for future OCR changes, changing timing but not quantum

By Kymberly Martin

NZ yields closed down 4-6bps. Overnight, US 10-year yields pushed above 2.61% before returning to 2.58%.

The initial catalyst for the move lower in NZ yield was a speech by RBNZ Governor Wheeler in which he reiterated his point from the April OCR review i.e. that future OCR hikes are highly dependent on the level of the NZ TWI.

“The high exchange rate, along with new economic data, will be a factor in our assessment of the extent and speed with which the OCR needs to be raised”.

This is due to the probability that a strong currency will depress inflation in the tradable sector, thereby limiting overall inflation.

Once these comments had set sentiment, the subsequent labour market reports provided yields with further excuse to extend their decline. While the reports showed soaring employment growth, there were minimal signs of wage (inflationary) pressures.

Overall, 2 and 5-year swap closed down 6bps each, at 3.95% and 4.44% respectively.

5-year is now back at its early March lows.

Due to the stubbornly high NZD we believe there is significantly increased risk the RBNZ pauses soon in its rate hiking cycle.

However, we see the July meeting as more likely than June.

However, we would warn against complacency on the OCR front. A near-term pause would not change the medium-term trajectory for the OCR, in our view.

The market now prices only around 130bps of OCR hikes in the coming two years.

We still see at least 200bps over this period.

Consequently, we continue to see hedging value in current 2-4-year rates. We would also caution that the currency is a double-edged sword. The OCR outlook could look quite different if the NZD were to fall sharply from its elevated levels (which it inevitably will, at some stage).

Early last night, US 10-year yields pushed above 2.61% aided by more conciliatory headlines from Russia’s Putin regarding Ukraine. However, yields slumped back to 2.58% after comments from Fed Chair, Yellen, at her testimony to the Joint Economic Committee.

As would be expected these were fairly dovish but also relatively vague. She reiterated that a high degree of monetary accommodation was warranted given “considerable” slack in the labour market and current low inflation.