NZ swaps largely followed offshore moves lower yesterday, closing down 2-5 bps.
Overnight, US 10-year yields have drifted down to 2.01%.
The NZ market remains fairly range-bound ahead of next week’s RBNZ meeting, taking its cues from moves offshore. This saw NZ 10-year swap close down 5 bps, flattening the 2-10s curve to 78 bps. Our preference remains to position for steepening within an expected 60-120 bps range.
At the short-end, the market still prices little chance (circa 20%) of a RBNZ rate cut next week. We remain ambivalent as to whether the Bank cuts next week or holds off until its December meeting.
Factors that might suggest a cut next week are (i) the NZ TWI is now around 7% above the RBNZ’s Q4 projected average (ii) despite a rebound in GDT dairy prices, this sector still faces very tough conditions (iii) business confidence has turned down (iv) if the RBNZ sees itself easing further, then why delay? However, we still see the meeting as too close to call.
Overnight, German yields gapped lower after ECB’s Draghi signalled this morning that the Bank will consider increasing its asset purchase programme. German 10-year yields now trade at 0.50% from 0.58% prior to the ECB’s meeting. US equivalents experienced some volatility and now trade at their lows for the night, at 2.01%.
These overnight moves will likely see downward pressure on the long-end of the NZ curve this morning. Otherwise there are no data scheduled domestically today.
Kymberly Martin is on the BNZ Research team. All its research is available here.
13 Comments
It is a good question. If they are going to ease further, (and the reasons to do so in their current, if in my view flawed, orthodox methodology are compelling), then why wait? The currency has reacted massively to Wheeler's last speech. He has some damage control now to undertake.
ECB advised it won't raise its OCR from 0.05 and will commence printing more money next year. Fed now looks like delaying any increase in its OCR to mid 2016 (if at all). RBA has a rate of 2%. NZ exchange rate increasing and Wheeler still happy to sit back while NZ's 2.75% rate further damages the economy and he ignores the RBNZ inflation target.
What mechanism is there to pull in line a rogue RBNZ Governor? Should penalties be imposed on the RBNZ (e.g. sacking Wheeler) if the inflation target is not met after a certain period?
QE have failed everywhere. Increasing reserves in central bank is "useless" if the banks don't give credit because the productive economy doesn't request credit. It does not reach the productive economy, hence it doesn't create inflation.
Unless we're trying too generate more bubbles, then yes, it's the best thing to do.
Are you saying the RBNZ should increase the OCR to get the economy pumping?
"QE have failed everywhere", my reply how can you know? Tends to be the logic of those with simplistic view eg Mike Hosking. Maybe if QE wasn't instigated around the world we would be in a worldwide depression. QE has lowered prevailing interest rates worldwide and pumped up bubbles, but it has prevented debt deflation that precipitated the great depression.
Try and source one time in history when QE has worked in the medium to long term to resolve financial problems. My understanding is it has never worked yet - not once.
However I believe it can achieve be successful short term.
Excellent question , the market has likely factored it in anyway .
I just wish the RBNZ was honest with us .
If its because they don't know what may happen next , then they should bloody well say so !
http://davidstockmanscontracorner.com/confusions-delusions-and-illusion…
"62% of Americans have less than $1000 of savings". Debt has become the money. Economies now depend low interest rates to keep the illusion going.
Thanks for the link , its astonishing how many young people have no clue about money because my son who is 18 and is a student , has a part time job , has his own diesel car ( and he enjoys life) , AND has managed to save $14,000 since he left school .
That's about 12 times the American savings rates in the article
The RBNZ job is to maintain price stability as defined in the Policy Targets Agreement (PTA). The current PTA requires the Bank to keep inflation between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint.
Currently Inflation is 0.4%. That is 1.6 below the target midpoint. Inflation has been below 1% for several quarters. It has been below 2% for years. So, the RB is deliberately not meeting its mandate.
Since 1990s the strategy has been to hammer inflation and hike interest rates to suppress the economy.
Global conditions have changed, but the strategy remains similar.
How about 1% loans to any inventor, industry, entrepreneur who can produce sophisticated products and sell them offshore and grow to scale?. If the Israelis with a similar population can do this with far less natural resources we could do this with intelligent govt initial sponsorship. Tourism, flooding International students into Queen st, & selling basic milk powder are not exactly deep industries supporting high incomes.
Fiddling with rates is so overrated and out dated. GFC screwed it up massively for the Central Banks and the Economists. Now they are all floundering. A big overhaul in thinking, policies and practices is necessary. Time for a new Keynes to raise ?
agree, bring in 30% LVR for all , make banks hold more capital and drop the rate to 2
If the RBNZ is serious about the NZD and it being too high they need to stamp it out now. No one is going to raise rates around the world for at least 6 months. If the OCR stays where it is everyone will jump on the NZD again it will move up toward USD 0.75 easily and then any OCR changes they instigate will only be able to bring it to levels we have now which based on their previous statements is still too high.
Of course they won't cut next weet, they say they don't like the NZD but want to see what happens in the coming months with easing likely blah blah blah.
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