There was an upward bias to US rates ahead of the ISM release, with the 10-year rate reaching as high as 1.62%, possibly reflecting the stronger China PMI data.
Then the big miss on the ISM, which fell to its lowest level since January at 49.4, triggered a strong rally in Treasuries.
The 10-year rate fell as low as 1.55% but is trying to crawl its way back up this morning. It currently sits down 1 bp for the day at 1.57%.
Near-term tightening prospects have been priced out of the curve a little, with the OIS market showing the September meeting priced at +5 bps (previously 8 bps) and the cumulative rate to December at +17 bps (previously 20). It’ll take a stronger than expected US employment report tonight to make the September meeting a better than even chance of a rate hike. Then there’s next week’s non-manufacturing ISM data hurdle to clear as well, which needs to continue to show the services sector in good stead. All up, we still think that December is a better bet than September for a hike.
Before the ISM data were released, bond king Bill Gross was interviewed recommending that the Fed hike in September and follow up again with another hike by March. He shared the view of many when he said the Fed and other central banks “are addicted to low and negative interest rates,” and need to break the habit even if it means economic pain now as opposed to later.
As expected, there was little change across the NZ rates curve yesterday, with swap rates from 2-year out up 1 bp across the curve and government bond rates up 1.5 bps. The 2-year swap rate closed above the 2% mark (2.0025%) for the first time since 4 August. Strong NZ economic data amidst a backdrop of rising dairy prices are raising some doubt about how keen the RBNZ will be to cut rates further over the next six months or so.
The prospect of the Fed hiking rates later this year have added to that mix and for now at least the NZD is not rocketing ahead, with the TWI no higher than it was back in mid-July despite a 45% rebound in whole milk powder prices.
The local rates market should be quiet today ahead of the US employment report and with Treasury rates not far off their level from yesterday’s local close.
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Jason Wong is on the BNZ Research team. All its research is available here.
5 Comments
I was surprised at how far Bill Gross went with his comments. He said that these low interest rates are killing capitalism. That's pretty accurate if the central banks keep heading down this path it won't just be NIRP or ZIRP they will be buying up corporate bonds, shares and property. Eventually the central banks will own most assets.
While that isn't happening here yet. Japan and China are going to great lengths to prop up investment assets. The cure for oversupply isn't printing insane amounts of money it takes a bit of pain.
If rates go up , New Zealanders are in for a big shock .
For example , if the current mortgage rate goes from 5% to just 6% , the instalment goes up by 20% .
If you are paying say $700 per week it goes to $840 a week . That extra $140 means that a salaried person needs to find ( or get a pay rise ) of an extra $200 a week ( around $10,000 a year ) in before tax money just to keep his home .
There are going to be casualties
Given our household debt levels currently NZ goes broke at 5.8% i.e household debt @ 17x income. NZ is headed for coffin corner.
There will still be a number of 2 and 3 fixed year mortgages at 6% and above from when the OCR was 3-3.5%. Those probably will not completely expire for another 1.5 years or so. Floating rates are still in the mid 5% range with around 30% of mortgages being on floating rate going to 6% wouldn't be that much different. Now 7-8% rates would be another issue.
Gross is right. We risk destroying Capitalism
When you destroy the value one of the four essential Factors of Production, in this case Capital , then you risk throwing everything out of kilter.
Land , Labour , Capital and Enterprise are the four , and they all need to be nurtured , protected , encouraged , and kept in balance as they have mutually dependant relationships in a modern market economy .
Communism destroyed enterprise, and was doomed to fail .
Trade Unions made labour too strong, eventually leading to under-employment , or a shift to places like Asia where labour was cheaper . Trade Unions have essentially failed to the point they barely exist .
The same with land , when its value is too high or too low it places the whole equation at risk , and an adjustment follows , its the natural order of things
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