NZ rates re-priced sharply higher yesterday, and the NZD touched 0.70 for the first time since mid-2018, after the Minister of Finance suggested the RBNZ Remit should include consideration of house prices. The market moved to all-but price out easing from the NZ curve yesterday, although there has been a partial reversal overnight. Offshore, equity markets, commodities and global rates have all pushed higher after Trump finally consented to the transition process and as the market continues to digest recent encouraging news on Covid-19 vaccines. The USD is set to close at its lowest level in 2½ years.
In an unexpected development, Finance Minister Robertson wrote to RBNZ Governor Orr yesterday afternoon stating his concern with recent house price appreciation. Robertson suggested that the RBNZ’s Remit be changed, by formally adding house prices as a consideration (i.e. the RBNZ should continue to target CPI inflation between 1 to 3% and maximum sustainable employment, while seeking to avoid unnecessary instability in output, interest rates, the exchange rate and house prices). There is no question that the RBNZ will remain operationally independent in setting monetary policy, but the political message seems clear. The announcement increases the communications challenges for the RBNZ to ease monetary policy further than already announced (the RBNZ’s planned Funding for Lending Programme, or FLP, is set to commence next month).
Late in the day, the RBNZ acknowledged the letter, pledging to work together with the government on the issue, but rightly pointing out that there are longer-term, structural issues at play affecting house prices, not just interest rates. The RBNZ added that the monetary policy response, both in NZ and offshore, is intended to lower interest rates, thereby promoting spending and investment in order to meet its inflation and employment objectives.
The market response was swift, with the OIS market largely pricing rate cuts out of the curve. The market now prices around 7bps of rate cuts, with the OCR now seen troughing at around 0.18% mid next year. The 2-year swap rate rose 9bps on the day, to close at a seven-month high of 0.31%, while 5 and 10-year rates increased by 11bps. NZ rates have reversed some of their initial moves post the NZ market close, after the RBNZ published its response, with swap rates falling around 4bps in London trading.
The NZD immediately spiked higher, from 0.6930 to around 0.6985, in the wake of Robertson’s letter. Overnight, it touched 0.70 for the first time since June 2018 amidst broad-based USD weakness, before sliding back to 0.6970. The NZD/AUD cross also spiked higher but, tellingly, it is has given back all those initial gains and now trades slightly below where it was pre-announcement. The NZD/AUD is trading around 0.9490 this morning, having pushed up towards 0.9550 yesterday.
The Financial Stability Report today and, particularly, the 11am press conference now take on greater market significance, with RBNZ Governor Orr likely to face questions on housing and its interaction with policy.
Offshore, the key news is that Trump has finally relented, consenting to the start of the transition process to the Biden presidency. While Trump added that his legal fight against the election outcome “STRONGLY continues”, the commencement of the transition process removes an uncertainty that was previously overhanging the market.
The S&P500 is up 1.5% overnight, with gains across all sectors, taking it to within touching distance of its recent all-time high. Sector rotation continues within the equity market, with small-cap and value stocks outperforming (Russell 2000: +2.1%) and big tech firms underperforming (NASDAQ: +1.1%). The outperformance of small-cap and cyclical stocks is consistent with the market incorporating a better medium-term growth outlook following recent encouraging news on Covid-19 vaccines. Likewise, commodity prices continue to head higher, with Brent crude oil rising over 4% to $47/barrel, its highest level since March, and copper – often seen as a barometer of global growth – closing it on its highest level in six years. The US 10-year Treasury yield is 3bps higher, at 0.89%, with the curve steepening overnight.
Currency moves reflect the risk-on tone to markets and growing optimism around the global economic recovery. The USD is broadly weaker, with the BBDXY index falling 0.3% and on track to close at its lowest level since mid-2018. The USD typically depreciates when risk appetite rises and the global economy experiences a synchronised upturn.
Commodity currencies are leading the charge, with the oil-sensitive Norwegian krone up 1.1% overnight, the AUD up 0.8% and the NZD 0.6% higher. In contrast, the safe-haven JPY and CHF have underperformed – both currencies are largely unchanged against the USD compared to this time yesterday.
Media outlets have reported that former Fed Chair Janet Yellen will be Biden’s choice as Treasury Secretary, with an official announcement due imminently. Yellen is seen by the market as being in favour of greater stimulus, although she will still need to contend with what is likely to be a Republican-controlled Senate.
In economic data, the German IFO business survey fell in November, mirroring the decline in the German Composite PMI released earlier in the week. US consumer confidence was also weaker than expected, which can be attributed to the resurgence in Covid-19 in the country and disappointment among Republican voters around the election outcome (the mirror image of the post-2016 surge in confidence). There was little market reaction.
In New Zealand, in another sign that the economy has been outperforming expectations, the government reported that the core operating deficit for the year ended June 2020 was $5b less than forecast at the May Budget. Since then, the government’s fiscal accounts have continued to exceed expectations, with the deficit coming in $3b better than forecast in the three months to September. The Half-year Economic and Fiscal Update (HYEFU) will take place this year on December 16th and, given the better than expected performance of the economy, we think the bond programme is likely to be further reduced. For the RBNZ, this would mean less bond buying would be needed and we expect the Bank to gradually taper its weekly purchase pace ahead.
The RBNZ FSR and press conference take centre stage in our time zone today. Overnight, the second estimate of US GDP is released alongside initial jobless claims. The US Thanksgiving holiday is on Thursday, so market trading activity may start to thin from tonight.