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A messy week ahead dominated by the US election risk which sees the 'fear index' on the rise and risk aversion to the fore. Markets less sure of RBNZ rate cut

Bonds
A messy week ahead dominated by the US election risk which sees the 'fear index' on the rise and risk aversion to the fore. Markets less sure of RBNZ rate cut

By Kymberly Martin

Ahead of a busy week, NZ swaps closed up 1-4 bps on Friday, while NZGB yields rose 3-6 bps.

On Friday night, US yields initially led global yields higher, following the US payrolls report, but drifted lower into the close.

The relentless rise in NZ longer-dated yields continued into weekend. NZ 10-year swaps have now risen by around 45 bps since the start of October, to 2.88%.

The rise in global yields has contributed, along with strong domestic data that has seen RBNZ rate cut expectations reined in. The market now prices less than one full 25 bps rate cut within the year ahead.

Heading into Thursday’s RBNZ meeting the market now prices around a 75% chance of a cut this week. In order to be consistent with its previous rhetoric, we expect the RBNZ to deliver a cut this week. We also expect it may maintain a modest easing bias. However, as highlighted last week, we now believe that 1.75% will mark the trough in the OCR for the cycle. NZ 2-year swap closed for the week at 2.21%, its highest level since mid-July.

US yields initially pushed higher on the solid (if below expectations) headline US payrolls number. The healthy 2.8%y/y increase in average hourly earnings, the strongest rise since mid-2009, likely also contributed. A December Fed hike remains highly likely and is more than 70% priced.

Fed Vice Chair Stanley Fischer referenced this market pricing whilst speaking at an IMF event on Saturday morning (NZT). He also said the US economy could “to some extent exceed our employment and inflation targets.” This could be viewed as implying some tolerance for overshooting its targets, in order to coax out more investment and hiring. This would be in keeping with Fed chair Yellen’s “high pressure economy” remarks of a few weeks ago.

However, the move in US yields proved short-lived. The overhanging mood of caution soon prevailed, heading into what will inevitably be a messy US election week. As risk aversion continues to rise (the VIX ‘fear’ index is at its highest level since late-June), ‘safe haven’ US Treasuries remain in demand. US 10-year yields ended the week below 1.78%, from intra-night highs near 1.82%.

An action-packed week gets off to a more leisurely start today. There is no domestic data due. However, Friday night’s decline in offshore yields may relieve upward pressure on NZ long-end yields as the market opens today.

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

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10 Comments

Only an economist could find cutting OCR as an appropriate step at the same time as:
- RBNZ seeking DTI limits on lending
- credit growth at 9%
- high business confidence,
- economic growth at 3.5%
- unemployment rate lowest 8 yrs
- Immigration at record levels.

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or maybe some of the "economists" are not cherry picking like you are (and indeed the bank economists have been, and have been wrong footed since 2008 IMHO.

Business confidence? give me a break, Its been "good" since what 2010? 2009? Its meaningless, its how some people feel how things will be not how things are. For how things are, look at inflation in the tradeable sector that is the real business rating/bell weather IMHO is it positive? So lets do a flash back, in 2013, http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletin… page 4 figure 2...going down like a lead balloon. Has it got better? all during this time (2009+) "business confidence" was buoyant.

data since 2013, (sorry its not well matched but finding such info can be a bit difficult)

http://www.rbnz.govt.nz/statistics/m1 2016 yony -2.1%

http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Analytic…

It was surprisingly "low" , some not accounted for, well not to me and the economists I listen to, not if you look at the economic effects of peak oil.

You miss looking at CPI inflation, I wonder why? http://www.tradingeconomics.com/new-zealand/inflation-cpi 0.2% CPI, barely positive. (also pick the 10 year average for a telling trend)

Also from the RB, http://www.rbnz.govt.nz/statistics/key-graphs/key-graph-inflation

Inflation forecasts,

http://www.tradingeconomics.com/new-zealand/inflation-cpi/forecast

1 year down trend, 5 year up but 10 year down again (this makes sense???? seems odd).

Credit growth, can be a sign of people borrowing to make ends meet, or getting tired of hardship and blowing some $s not necessarily "positive".

The RB requiring DTI limits is perfectly understandable, its a counter to the need to drop the OCR to stop the tradables suffering even more, an extra "drug" to treat the side effect of the main drug if you will.

Economic growth, GDP? maybe its one big lie? wages growth? seems negligible for many people, reflected in CPI going no where if their wallet is empty.

90 day rate,

http://www.rbnz.govt.nz/statistics/key-graphs/key-graph-90-day-rate

what a trend.........

Is cutting the OCR justified? good Q.

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.Is cutting the OCR justified? good Q.

For close to 30 years now, central bank policies have nurtured serial inflationary booms and busts. It’s a backdrop that has repeatedly forced investors, homebuyers and others into serious harm’s way. Buy or you’ll be left behind. Get aboard before it’s too late. It’s a system that systematically targets the unsophisticated and less affluent to take on a tenuous debt position to buy homes, cars and things in the name of promoting economic growth. It’s a system that devalues the wealth of savers. Somehow it’s regressed into a system with a policy objective to coerce savers and the risk averse, to ensure their buying power instead inflates the value of risky securities market assets. Read more

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I don't see any grounds for the OCR cut as it's devoid of meaning and purpose. The ANZ economist is waffling about they need deposits to lend money. Obviously that's a lie but reading between the lines their bank and other banks have a cash flow problem.

So what is causing the cash flow problem. No doubt they will have a substantial bulk cash flow from all the mortgage lending, as most of it is new it will be front loaded with interest and a small amount of principal. This should be good but I suspect there is a lot of USD denominated debt that the banks are servicing and ending up with a small slice of the interest. That in itself should not be a problem but the parent banks in Australia are draining as much money as they are allowed.

Of course the parent banks can't drain term deposits so this is the logical choice to allow large volumes of lending, but that means they would need to steal customers from other banks. That's not going to allow for the insane credit growth that has occurred up until now.

I'm more focused on the coming credit crunch rather than the debt fueled unsustainable consumerism.

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Depends on your prespective, my one is for 30 odd years CBs have tempered the worst of the booms and busts. have they done a perfect job? no, fairly obviously not.

"repeatedly forced ------ homebuyers and others into serious harm’s way." no Govn policy has been the cause of this not the CBs.

"investors" there are the investors and then speculators/ financial parasites. The latter have clearly acted in a manner that has helped cause the booms and busts praying on the former ie the financial parasites damage the real economy, even make things worse to profit and foolishly we have been allowing them to get away with it. How will that work out? well Mark Blyth has it down pat IMHO on their future.

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Fair cop, but those are the "facts" that economists are citing,
I am sure they are all suffering from cognitive dissonance.

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These are indeed facts, numbers, data. Do you ignore them? go with your gut feel?

"cognitive dissonance" I dont agree here I think they have been consistently blind to the facts and data, repeatedly hoping things get better with no justification than it did in the past. We have now however gone through an event that has not really happened in 10,000 years.

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Only a non economist would point out these factors as you have...

RBNZ seeking DTI limits on lending
- This cuts consumption. Thus, cutting domestic inflation pressure.
- This will also address the credit growth issue in non productive investment.
High business confidence:
- confidence in what? Inflation expectations? Lower wages? We've had the same thing said for years with no true context attached.
Economic growth at 3.5%
- Correction: GDP growth at 3.5%. Productive growth is not at 3.5%.
Unemployment rate at lowest in 8 years.
- Not difficult when you change the definition and measure every couple of years.
- If unemployment is so where is the inflation associated? There is certainly no wage inflation, which we would expect under this condition.
Immigration at record levels
- Unless in the case of highly skilled workers, the net effect of this is going to be downward pressure on inflation.

So, even with the most briefest of logic, it is pretty easy to offer some justification for a rate decrease based on your cherry picked stats.

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RBNZ just following market interest rates down and constantly and erroneously claiming it as "stimulus" to arrest falling CPI inflation after 150 bps of ineffective OCR cuts.

As I noted else where today.

And the risks defined by Federal Reserve Vice Chairman Stanley Fischer are:

First, and most worrying, is the possibility that low long-term interest rates are a signal that the economy’s long-run growth prospects are dim. Later, I will go into more detail on the link between economic growth and interest rates. One theme that will emerge is that depressed long-term growth prospects put sustained downward pressure on interest rates. To the extent that low long-term interest rates tell us that the outlook for economic growth is poor, all of us should be very concerned, for–as we all know–economic growth lies at the heart of our nation’s, and the world’s, future prosperity Read more

NZGS 2027s yield ~2.80% - below the upper CPI inflation boundary imposed by the RBNZ. Discounting future growth by the 2% midpoint CPI inflation target leaves little to build an economy necessary to pay down record debt measured against disposable income.

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I do not disagree on the bandwagoning.
Ineffectiveness is contentious, though.

More importantly though, that is not the perspective that Peri was arguing.

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