The NZ rates market reaction to the new government has been interesting, with lower short term interest rates alongside a pushing out of rate hike expectations, despite higher inflation expectations.
On Friday, the 2-year swap rate fell by 4 bps to 2.17% and pricing for the first full rate hike was pushed out a few months to February 2019.
There was a steepening of the yield curve, with the 10-year swap rate up 1 bp to 3.21%, taking the 2s10s spread from 99 bps out to 104 bps.
At the same time, rates on the long-dated inflation-indexed bonds fell, while nominal government bond yields were higher, implying higher break-even inflation rates. Using the 2025 bonds, inflation expectations rose by 6 bps to 1.23%, taking the two-day gain to 12 bps (with the Thursday’s session getting a whiff of the Labour-led government before the official announcement).
So overall the market’s interpretation of the new government is lower real rates consistent with a softer economy, but higher inflation and more tolerance for higher inflation, with an implied delay to any RBNZ rate hikes.
All of this is highly debatable, of course. The market has reacted in a very high-level way, but the devil will be in the detail – who will be the next RBNZ Governor, when and how will the RBNZ Act be changed, and will any re-write actually change much the RBNZ’s reaction function? All of those details matter.
On Friday, NZ equities opened on a soft note and were down 1.2% early on before staging a strong recovery and ending the day 0.1% higher. Export stocks and those with large offshore revenues outperformed, while property stocks, including the retirement sector, and domestic-focused stocks underperformed.
US 10-year rates are higher since leaving the office on Friday, supported by the aforementioned Budget resolution and speculation around the Fed chair/vice chair appointments. The 10-year rate failed to break the important 2.40% level, but is close, at around 2.37%.
Today we’ll be on tenterhooks awaiting the possible release of coalition agreements and agreed policy positions. Winston Peters is set to be Deputy Prime Minister and Foreign Affairs Minister when PM-elect Ardern officially allocates portfolios tomorrow.
Tonight sees the release of global PMI data.
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Jason Wong is on the BNZ Research team. All its research is available here.
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