By Jason Wong*
US Treasuries showed a sharp turnaround Friday night, with yields closing lower after trading at fresh three-month highs. The US dollar (USD) tracked the turnaround and finished modestly weaker after heading higher through the Asian trading session. The NZ dollar (NZD) closed just under the 0.6250 mark after a test of the key 0.62 support level.
There was little news on Friday to guide markets but there was still some notable price action. Through Asian trading and the early European session, US Treasury yields extended their run higher, with fresh three-month highs for both the 2-year and 10-year rates, the latter peaking at 3.925%. From that point on, there was a sharp turnaround, with an 11 basis points fall in yield to close near the low for the session at 3.815%. There was no obvious explanation for the turnaround, with traders noting some short-covering flows ahead of the long US weekend, and the move coincided with a similar track for German bunds. Still, the 10-year rate was up for the fourth successive week (+8bps), reflecting the run of positive economic surprises and fears that inflation could remain stronger than longer following the uncomfortably high Consumer Price Index and Producer Price Index prints.
This was seen to add to the chance of more Fed tightening than previously thought. Goldman Sachs and Bank of America economists added another 25bps to their Fed Funds rate projections, both now picking three more 25bps hikes over the next three meetings through to June, for a peak target range of 5.25% to 5.5%. Market pricing for the peak Fed Funds rate closed the week at 5.19%, or 61bps higher than the current effective rate, meaning two full hikes and a near-even chance of a third additional hike.
Fed speakers continued to run the line that there was more work to do to contain inflation pressures. Richmond Fed President Barkin still favoured hiking in 25bps clips but didn’t get drawn into how high rates might need to go, saying “how many of those, I think we will have to see”. Fed Governor Bowman said “we’ll have to continue to raise the federal funds rate until we start to see a lot more progress” on reducing inflation and she would be looking for “a consistent decline in inflation” before favouring pausing rate increases.
The USD followed the move in Treasury yields, trading at a fresh six-week high before reversing course. Reflecting this profile, the NZD briefly traded just below 0.62 – a key support level – before rising through the US session and closing the week just under 0.6250, albeit down now for three weeks on the trot. Narrower NZ-US rate spreads was one factor for NZD weakness last week, as the market pared expected (Reserve Bank) RBNZ hikes (see below) at a time when it extended the path of Fed hikes.
The AUD (Australian dollar) fell towards 0.68 before closing the week around 0.6880. The NZD was flat to modestly weaker on the crosses. The only economic data released of note was a “surprise” lift in UK retail sales volumes in January, with the volume of core sales up 0.4% m/m. This continued the pattern seen elsewhere, of stronger January data after a weak end to last year – speaking to some widespread seasonal adjustment issues around the turn of the year featured across a number of countries.
The domestic rates market saw further re-pricing of monetary policy expectations that pushed short rates down, while longer term rates ticked higher, resulting in further curve steepening.
The devastation wrecked by extropical cyclone Gabrielle, as well as the weaker inflation expectations print earlier in the week, has the market convinced that the RBNZ won’t be delivering a 75bps hike this week, and the Bank is more likely to settle on a 50bps hike, with a small chance of either no change or a smaller 25bps hike, with Overnight Indexed Swap (OIS) pricing closing at 4.715%.
The 2-year swap rate ended the day down 6bps at 5.09% – down 16bps from the 5.25% peak earlier in the week, albeit down only 2bps from a week ago. The 10-year swap rate closed the day up 3bps at 4.49%.
Sunday, Finance Minister Grant Robertson put a figure on the expected cost of recovery at $13b of “around the ballpark that we’re looking at right now in terms of the cost”. That isn’t the government’s share, as insurance will cover some of that. NZ Government Bonds slightly underperformed swaps last week in a kneejerk reaction to the likely increased bond supply to cover the costs of the government’s share. But with tight supply conditions, rebuilding infrastructure will take many, many years so the fiscal cost would be spread over a long time.
The calendar for the day ahead is light and the US Presidents Day holiday will likely mean quiet trading conditions. In the week ahead the domestic focus turns to the RBNZ Monetary Policy Statement on Wednesday, where expectations are centred on a 50bps hike in the OCR to 4.75%, as noted above, and the projected rate track likely no higher than the 5.5% peak projected in November.
The same day, Australian wages data could be market moving if it surprises in either direction. Globally, the key releases include flash PMIs (Services Purchasing Managers' Index) for February and US spending and income data alongside the PCE deflators (Personal Consumption Expenditure Deflator) at the end of the week.
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*Jason Wong is Senior Markets Strategist at BNZ.
36 Comments
It might feel like it but there's so much more debt baked into the system relative to incomes than there has been before. Plus, a culture in which people are just used to having to live paycheque to paycheque - hard to change the habits you've bred into the population through loose monetary policy when you suddenly need to in a hurry.
Once they reach it I'm not sure there would be a thing as "overshoot".
As for how long, well the RBNZ has never made clear what timeframe they use to determine an average inflation goal. If we've spent a couple years at around 7% inflation then we could get a couple years of negatives.
Two decently sized AGW charged events already and its only February. What is going to be the climate change cost this year? Remember all the "experts" saying that its only supposed to be less than 2% of our GDP in terms of cost, even if we do nothing over the next 100 years, right? Aren't we already around 5% for this year? And that's not including the lost income from all those industries with their crops destroyed (apples/grapes etc).
Lets just keep our heads in the sand though right? That will fix it.
Climate change took down the Khmer Empire and Angkor, arguably one of the most advanced pre-industrial cities ever built and the cradle of the Empire's power. They never recovered. The NZ culture likes to think it's pretty special but I personally think it pales in comparsion to this civilization. Maybe we think we're too clever than what we acually are.
https://www.nationalgeographic.com/science/article/angkor-wat-civilizat…
It may have been a contributing factor to their decline going by wikipedias list. And only considered more recently. Could we perhaps be trying to rewrite history to make it fit the modern day narrative? Suddenly all of the past great civilisations will have their demise contributed to climate change...
From RBNZ : Inflation at 7.2%, OCR at 4.25%.
Gabrielle is going to be massively inflationary as rebuild money flows into the economy through builders and associates, as well as infrastructure expenditure.
There is going to be the need to ensure the demand for goods is allocated mostly on those who NEED (i.e. rebuild/repair) rather than WANT (reno, specu, toys etc), and I expect this will involve a rates increase as the needs will outweigh the wants in demand (i.e., those for whom insurance/govt is assisting vs those raising personal finance).
The cyclone should not be looked at as a gift horse to relieve the overleveraged but otherwise unaffected from their debt burden.
Where to spend that $13 billion? Relocating that Redcliff substation seems an obvious one. People continuing to live in the Esk Valley after two floods in 5 years? Would require a legislation change I imagine to essentially forcibly evict people from their homes and livelihoods. How to continue farming these low lying fertile river flats and prevent catastrophic losses from flooding? Relocate all the people out of harms way and a farmers collective farms the remaining land as an enterprise? We need to re-think how we farm these areas methinks. Northland, Bay of Plenty, Tairawhiti and now Hawkes Bay. Our food baskets. A national treasure that requires a new way of thinking that protects property rights at the same time as maintaining production.
Some difficult to get to Hill country may require abandoning in favour of mass replanting of natives. An RSE investment sponsored by the Government maybe?
Would you stay there and invest if you couldn't get insured? The private sector reacts quicker than Govt.
A few decent fines under the RMA would help. We prosecute when a fire gets out of control, seems we should be doing same when the land is thrashed and the $$ effect gets dumped on others.
Whats the diff between dumping effluent in a stream and farming/foresting so poorly the hills cant take it?
That's true. I think the stuff article the other day said 10 forestry outfits were fined after the last event.
Personally, I'd like to see pine forestry industry fined into oblivion. Having lived next to a block, they have no morals whatsoever.
Start noisy machinery at 4am after telling neighbours work days start at 7am? Check!
Destroy public highways with 50T loads? Check!
Drive at 35kmh on said roads and never pull over into a layby? Check!
Fail to clean wheels from the site and cover kilometres of the road with dangerous slippery mud? Check!
Fail to clean up sites and let weather events wash the results into the waterways? Check!
Have a high rate of worker injury/death because H&S is for other people? Check!
Too often the forestry industry just does what it pleases, and the legislation covering it is woefully inadequate (most of the considerate neighbours stuff, for example, is simply non-existant).
There'll be some money flow from the budget, that's already being socialised.
The big question is whether the current lot (and/or their opposition) will stand firmly on anything in an election year.
Uninsured folks already have their hands out for buyouts and this is already being done in AU. So why insure if the govt is just going to buy you out?
You want to live on the coast/lake/river/stream/floodplain? want the views from the cliff? You pay your money and take the risk. Not like climate change is a surprise is it?
Insurance folks are already jocky-ing for some form of additional state funding (floating the old "some homes will become uninsurable" to whatever media outlet will propagate). As if they weren't already effectively doing that with massive premium hikes. Any of the parties have the nuts to stand for a state insurer? Probably not, that opens the door to socialise any type of insurance that isn't palatable to private insurers (i.e. anything potentially not profitable).
Climate folks will quite rightly be lobbying for more greenery to soak up the flooding - good idea - but you will note that nature does flood, and quite regularly - it's part of the natural cycle. So design more in line with nature, sure, but green for green's sake won't cut it.
Then there'll be those who argue they own the water, and therefore now own everything that is flooded... 3 waters will become many more waters.
And that's all after we deal with the scumbags looting places. IMO it should be army deployed, curfew, shoot on sight - but no politicians have the nuts for that. "Oh poor johnny was just looking for a bathroom in that flooded mansion..." right... watch the looters get barely/if any jail-time, and see them multiply for the next natural disaster.
I totally agree. I cringe everytime I hear a statement from the Police saying that they are "disappointed", "expect better", etc. How about issuing a statement that all looters will be lined up, photographed (so we all know who these low lifes are), before being given the maximum jail time. This is no time for the Govt to be kind.
If the authorities are not going to do anything, then maybe we need vigilantes? Looting during a natural disaster is not an "error in judgement", it's an absolute POS thing to do and I'd question if someone has the propensity to do that, are they ever capable of being rehabilitated?
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