A bias to steepen

Strong NZ GDP growth doesn't change market expectations of more RBNZ OCR rate cuts, likely in November. International steepening trend flowing from Japan

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Strong NZ GDP growth doesn't change market expectations of more RBNZ OCR rate cuts, likely in November. International steepening trend flowing from Japan

16th Sep 16, 7:48am by Jason Wong

By Jason Wong

Global yield curves have maintained a bias to steepen. The US 2-year rate is down 3 bps to 0.73% following a series of soft economic indicators, while the 10-year rate is flat at 1.70%.

US retail sales and industrial production showed larger than expected falls in August. The headlines of the regional Philly Fed and Empire business surveys seemed okay, but both had a weak under-belly. All in all, following other recent weak indicators such as the ISM and non-ISM indicators, the data play into the hands of the doves on the Fed, who want to process cautiously with rate hikes. Only a large CPI surprise tonight could possibly change that view. Less than 5bps of rate hikes are now priced into the OIS curve for next Thursday’s rate decision.

The nine members of the Bank of England’s MPC unanimously voted to keep policy unchanged. In terms of the policy outlook the minutes showed “a majority of members expected to support a further cut in bank rate to its effective lower bound” later this year, should the outlook in November remain broadly consistent with last month. And at this stage the committee’s view of the “contours of the economic outlook” hadn’t changed, despite some stronger than expected economic releases of late.

NZ GDP data didn’t seem to change market expectations of the NZ monetary policy outlook, with the OIS curve showing no change. Even though the quarterly outturn of 0.9% q/q slightly disappointed, upward historical revisions ensured that annual growth of 3.6% was in line with market expectations, and above the RBNZ’s assumption in August. A stronger economy doesn’t change the fact that there is little inflation pressure in the economy, which is the key focus for policy. A November rate cut still looks odds-on, with 15 bps priced in.

The 2-year swap rate rose by 1 bp to 2.075% while the 10-year swap rate fell by 2.5 bps to 2.61%, suggesting a flatter curve, against the recent trend. However, global forces remain one of steepening. A massive steepening of Japan’s curve is flowing through into other markets. Speculation mounts that the BoJ is about to change tack on its bond buying programme, encouraging a steeper curve to support its banking sector and foster improved credit growth. All will be revealed next Wednesday.

Daily swap rates

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Source: NZFMA

Jason Wong is on the BNZ Research team. All its research is available here.

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1 Comments

by Stephen Hulme | 16th Sep 16, 10:40am 1473979232

A stronger economy doesn’t change the fact that there is little inflation pressure in the economy, which is the key focus for policy. A November rate cut still looks odds-on, with 15 bps priced in.

Hmmmm....

In its latest global economic update released at the start of June 2016, the OECD now complains that the global economy has fallen into a "low-growth trap."

The idea of a low-growth trap while accurate is still itself deceptive and perhaps disingenuously so; it is passive and thus attempts by its very phrasing to avoid providing any answers. The expression expects that you will just accept the current outcome as a matter of accident; the economy is growing just not quickly enough. Given that construction, it almost doesn't sound too bad, maybe even just positive enough so that nobody bothers to ask what it is. It is the latest equivalent of "jobs saved."

For the OECD, the trap itself is derived from more passive circumstances. Because of a "prolonged period of low growth... Business has little incentive to invest given insufficient demand at home and in the global economy, continued uncertainties, and a slowed pace of structural reform." That would certainly account for low and lower interest rates (with no opportunity, invest only in the riskless), but it still remains unanswered why the "prolonged period of low growth" in the first place. The trap part of it is straightforward, even if purely as a matter of expectations. But there are no answers as to why expectations would first have fallen to such a condition and then remain there year after year after year. Read more

Please explain why CPI inflation remains extraordinarily low after 150 bps of OCR cuts and why more would avert this reality? Dogma just doesn't cut it anymore.