If the RBNZ cuts the OCR today, that will only tone down the market rises in interest rates which seem unavoidable. Trump win sets up a more hawkish US Fed

By Jason Wong

The US elections caused a wild swing in US Treasuries.  In Asia trading, the 10-year rate fell to as low as 1.71%.

It has been a steady grind higher since early evening and it currently trades at its high for the day of 2.04%, a level not seen since January.

Market participants’ fear of President-elect Trump already seem to be somewhat mollified in the hours following the victory speech, and the focus will immediately turn to economic policy.

Fed Funds futures have jumped around, but the market still prices in an 80% chance of the Fed tightening in December, after falling to less than 50% at one stage.  Any tightening will be contingent on how financial conditions prevail over coming weeks.  A resurgent USD and volatile markets would reduce the chance of the Fed moving.

Next year’s rotation of voting FOMC members sees some hawks replaced by doves.  Trump has the ability to appoint two hawks to take up the current vacant Governor positions, which should overall eventually tilt the balance towards the more hawkish end of the spectrum.

One of Trump’s pre-election calls was that the Fed was too political, keeping interest rates too low and causing more harm than good to the economy.

It will be interesting to see how this debate plays out and whether Yellen has the stomach to stay her full term through to early 2018.

A platform of Trump’s policy agenda is considerable fiscal expansion, with a combination of increased infrastructure spending and widespread tax cuts.  This sets the scene for a wider fiscal deficit and increased inflationary pressure.  The sell-off of US Treasuries reflects this risk.

There will be considerable upward pressure on local rates today.

Yesterday, NZ government bond yields fell by 8-10 bps as at that stage the US 10-year rate was trading around 1.73%.  The swap curve flattened, with the 2-year rate down 4 bps to 2.20% and the 10-year rate down 7 bps to 2.89%.  There is likely to be a considerable steepening of the yield curve today.

Today, the RBNZ is widely expected to cut the OCR for a final time this cycle by 25 bps to 1.75% and maintain an easing bias, a reflection of the sub mid-point CPI projections.  If so, 2-year swap should be fairly well anchored amidst a significant sell-off further along the curve.

While many question the need for further rate cuts, the reality is that fixed mortgage and term deposit rates have been rising despite OCR cuts of late anyway due to other forces.  Recent rate cuts have simply toned down the extent of these rises, and one more rate cut will do the same.