'If the RBNZ is to be consistent, it will cut without delay'

Bonds

The TWI now the 'more pressing indicator' for official NZ interest rate settings. Offshore eyes firmly on US non-farm payrolls report

1st Apr 16, 8:31am by Kymberly Martin

By Kymberly Martin

NZ swap and bond yields closed down 2-5bps yesterday.

Overnight US 10-year yields traded a reasonably contained range, at 1.80% currently.

Yesterday morning the NZDMO announced the launch of its new nominal NZGB2025. Up to NZD 2 bln will be issued. The deal will price today. The new bond will sit between the current NZGB2023 and NZGB2027 on the curve. Yesterday, these both closed down 5 bps, at 2.52% and 2.93% respectively.

The NZ swap curve showed little response to yesterday’s domestic data highlight, the ANZ business survey. The survey showed growth indicators remained solid and inflation expectations consolidated after their recent fall, at 1.4%. There was nothing in the survey to really change the RBNZ’s view of the world. We suspect the Bank remains committed to cutting the OCR at least once more.

Perhaps the NZ TWI is now the more pressing indicator to watch, sitting at 73.10. The RBNZ’s assumption was the TWI would average 70.9 through the June quarter. If it continues to hang around at these levels it will knock at least 0.3% off the RBNZ’s year-ahead inflation forecasts, dropping the March 2017 annual pick to 1.0%.

From a consistency perspective, the RBNZ would have significant difficulty in arguing for any rate-cut delay. Indeed, the argument for a cut in both April and June becomes strong. We thus put a cut on 28 April at 50/50 odds, with a cut by June almost a done deal. By contrast, the market does not fully price a cut until the August meeting.

Overnight, in the absence of major data shocks and fairly steady commodity prices, US 10-year yields pushed up toward 1.83% before drifting back down to 1.80% currently. It is now all eyes on tonight’s US payrolls report, though we also have China PMI releases this afternoon that could impact on risk sentiment.

Daily swap rates

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Source: NZFMA

Kymberly Martin is on the BNZ Research team. All its research is available here.

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6 Comments

by Country boy | 1st Apr 16, 9:17am 1459455440

Agreed - that is if the RBNZ is consistent and transparent. However, experience to date is that the RB is not particularly concerned about meeting inflation targets when setting the OCR. They have other concerns (stability?) which seem to take precedence in random and unexpected ways. As a result, although any other central bank could be expected to cut and cut rapidly the RBNZ may very well hold and hold until the productive sector is completely shot. Who knows what will happen!

by Andrewj | 1st Apr 16, 9:28am 1459456095

Talked to a guy I who used to work for me on the farm. Retired at 68 but now going back going work to pay the bills as his investments are not performing with the low interest rates. Working as a plumber he is replacing a young plumber and his experience will all get him work ,which is just what happened, a few phone calls and he is nearly full time.

Low interest rates are great until people cannot afford to retire, assets stay at unrealistic levels and business models that have failed keep on going and going never facing the music.

Debts keep climbing on assets that don't create real wealth while the productive sector is facing huge systemic failure in a high cost low return economy.

A friend wanted to buy a house in Havelock north last week, on the market at 700k ish, up for tender some AKL'er paid 1.2 mill.

by Roelof | 1st Apr 16, 9:46am 1459457212

History will show the Inflation targeting policy framework to be an archaic ...blunt..rusty tool that was created to manage the growth of Money supply in an inflationary era that has long gone by....

It is counter intuitive.... but it is lower interest rates , together with unfettered Credit growth which is destroying the true essence of Capitalism....

The inflation targeting framework is a relic....
Do we need for asset prices to double from here before the right questions are asked at the Political level..??
My guess is that the only thing they will argue over, will be how much of a Capital Gains tax they shoukld impose..

Students of History will ask why we stuck with it right until the bitter end....

by Country boy | 1st Apr 16, 3:40pm 1459478441

Interest is nothing but the price of money and goes up and down as other prices can. It is not part of Do not think we are yet in the game of targeting peoples incomes by changing interest rates just as you should not target particular wages or returns to farming. Monetary policy can lower the price of money when supply is too high (for what ever reason) decreasing the returns to it. This will decrease saving and increase spending (and economic activity) and returns to those who work for wages. Admittedly assets that make good money will increase in price but this is not unusual either. Its a process of adjustment. Central banks should not stand in the way of that adjustment as this central bank seems to want to - of course with open capital flows the RB can only succeed at holding interest rates up for the short term before a rising exchange rate will cause so much damage that the exchange rate falls rapidly. Dangerous game paying chicken with large capital flows searching out out of line interest rates!

by Stephen Hulme | 1st Apr 16, 11:04am 1459461862

If it (TWI) continues to hang around at these levels it will knock at least 0.3% off the RBNZ’s year-ahead inflation forecasts, dropping the March 2017 annual pick to 1.0%.

Yes indeed and a strong confirmation of monetary policy failure. Wheeler should bow his head in shame in the sanctity of early retirement.

Europe points to our demise.

Central banks intend that monetary policy drives economic inflation, and that does seem to be the case except that the monetary part has not really involved central banks.

The stimulant part of the recipe has been removed from the “stimulus”, a condition that central bankers (and the media that still blindly defers to them) seem yet unaware but markets are increasingly taking note. This relationship has been true for far longer than just this “cycle.” The difference pre-2007 was that everything ran on faith, that the threat of central banks being asked to prove their printing press was enough. After 2008, the threat was no longer so decisive, forcing central banks to actually prove themselves. They have, repeatedly, starting with the events of 2008, only in the opposite; that there is no money in monetary policy and hasn’t been for so long that nobody quite knows what to do about it except to rinse and repeat. Shampoo central banking. Read more.

by Brutus Iscariot | 1st Apr 16, 11:25am 1459463107

Yeah, lower interest rates will save us.

*Yawn*

The intellectual bankruptcy of economic thought and practice by central bankers (and their followers in the mainstream financial industry) this century, actually threatens to destroy capitalism.