It was all about the Bank of England overnight, with the Bank over-delivering on expectations for further policy easing. The Bank was willing to look through a temporary increase in inflation to an above-target level, driven by the weaker GBP, and ease policy regardless.
In addition to the series of policy measures delivered, the committee signalled that more easing could be on its way soon, even on current forecasts. “If the incoming data proved broadly consistent with the August Inflation Report forecast, a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.” Governor Carney made his disdain for negative interest rate clear and the BoE will not be going down that track. The MPC currently judges the lower bound to be “…close to, but a little above, zero”.
The 25 bps rate cut and promise of more even on current forecasts and an additional £60 bln of asset purchases (including £10 bln of corporate bond purchases) led to a strong rally in UK gilts. The 10-year rate fell by 16 bps to a record low of 0.64%.
This move flowed through into European and US markets. Germany’s 10-year rate fell by 6 bps to minus 0.10%. The US 10-year Treasury rate is down 4 bps to 1.50%.
In local trading yesterday, we saw the 2-year swap rate fall below 2% for the first time ever, and the OIS rate for the August meeting dipped below 2%. Some offshore investors were willing to effectively buy a low-cost option of the RBNZ delivering a surprise 50 bps cut next week. We think such a move is unlikely – unless the RBNZ is willing to make a surprise 200 bps rate cut, then leaving rates well in excess of global benchmarks is only going to have a temporary impact on the NZD.
At sub-OCR levels, some paying interest returned to the market and the 2-year rate closed at 2.005%, down 2 bps for the day. The 10-year swap rate closed down 1 bp to 2.4650.
The BoE over-delivering on policy stimulus is likely to persuade those offshore investors that a 50 bps NZ cut is not off the table. Combined with the rally in global rates, the bias for yields in the local market will be lower today.
The RBA’s Statement on Monetary Policy is the only release of note scheduled during local trading hours. The market will be scouring the document looking to see if expectations of a further rate cut over the coming year can be justified.
The US employment report tonight will be focus for the market today. Given speculative investor positioning (long Treasuries) and low yields the US curve is seen to be vulnerable to a stronger than expected payrolls print.
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Jason Wong is on the BNZ Research team. All its research is available here.
2 Comments
No matter what the Fed does, or any global central bank, inflation only decelerates now. It has been 50 months and still counting since the PCE Deflator was at the Fed's now explicit inflation target of 2%. And oil prices figure prominently again, though not as some excuse to dismiss the number, but as a shining beacon of the wholesale money framework where the modern "dollar" is at its center. Of the past nineteen months, the Fed's preferred inflation measure has suggested general price changes of less than 1% in eighteen of them, including, "unexpectedly", the last five.
This despite trillions upon trillions in "stimulus" offered primarily through QE's that vastly swelled the global count of "bank reserves", including in dollars, as if they were all monetarily germane. The people sense instead, as in the 1970's, grave monetary mistakes. Economists are stumped, and even lashing out at the public for even thinking it. The media refuses to report it. Politicians, mostly, run away from it. Yet, it is all right there in the public record. Read more
Time for RBNZ to surprise the market - cut OCR, 1% burn speculators, reduce much overvalued NZ$ to improve exports/decrease imports and control mortgage problem with weighting changes to loans and/or loan to income restrictions especially investment property purchases. Not betting the farm on this outcome though!!
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