Change of Government expected to bring higher inflation expectations, increased debt issuance and an added risk premium for a steeper curve from here

By Jason Wong

For NZ rates, our offshore desks report not a lot of trading action, and price action has been muted overall.  NZ 2-year swap got offered down a couple of 2 bps to 2.18% where it met some paying interest and we saw some slight curve steepening.

Once the sticker-shock fades we see upside pressure to rates, but it is arguable how significant this is or should be.

Adding employment into the policy mix for the RBNZ is within global norms (eg RBA, Fed) and won’t have much impact on policy, with the NZ economy close to “fully employed”. 

Easier fiscal policy and a weaker NZD need to be considered by the RBNZ as it considers its next policy move.

The NZ-US 10-year spread is at the lower end of recent ranges, and upside pressure looked likely to prevail no matter what the hue of the government.  Higher inflation expectations, increased debt issuance and perhaps an added risk premium argue for a steeper curve from here.

In overnight news, a modest risk-off mood has prevailed, not helped by some disappointing US earnings.   US jobless claims fell to their lowest level since 1973 and on a population-adjusted basis they moved to a record low. UK retail sales were softer than expected, with annual growth of 1.5% down to a four-year low.  UST yields are down 2-3bps across the curve, with the 10-year rate down to 2.32%.

Catalan President Puigdemont refused to back down from his claim for independence triggering Spain’s PM Rajoy to issue a statement invoking Article 155 of the Constitution “to restore the legality” of the semi-autonomous region.  This saw EUR fall 50pips to 1.1770 but it has since recovered that move and some to trade at 1.1830.  AUD has been well supported after another strong employment report, seeing it trade up to 0.7875.

The calendar ahead looks fairly light and focus will remain on NZ political developments in the day(s) ahead.

Daily swap rates

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Jason Wong is on the BNZ Research team. All its research is available here.