BNZ Research

Our research team offers expert commentary on economics, foreign exchange, fixed interest and credit, to help inform your organisation’s risk analysis and decision making. 

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Currency Research

NZD: Recovery ahead of schedule

Jason Wong -

While we have been cautious/uncertain about the near-term outlook for the NZD, we have been bullish on its prospects from mid-year onwards. It now looks like the expected recovery has begun a month or two earlier than expected and we revise up our forecasts.

Full Currency Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

NZD Corporate FX Update

Jason Wong -

We remain cautious on the NZD through Q2, but see prospects for a sustained recovery from the second half of the year, extending into next year.

Full Currency Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

NZD/AUD: Macro Headwinds

Jason Wong -

We see the fall in NZD/AUD over the past few weeks as justified, post the overshoot to parity.

Full Currency Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Economy Watch

QSBO Shows COVID Shock

Doug Steel -

Today’s NZIER Quarterly Survey of Business Opinion did not make pretty reading. It was never going to, given the economic disruption and dislocation the nation has suffered over the past few months. In short, the QSBO confirms the economic damage done. So, nothing to move financial markets. But the Q2 outcomes were worse than what firms previously expected, bringing abrupt adjustment. That adjustment is not yet complete.

Property Market Under Pressure

Stephen Toplis -

The New Zealand property market is under pressure. The combination of slowing population growth, falling employment and structural change spells bad news for property owners of most types. The attached chart pack presents a pictorial overview of how we are seeing the environment for this sector currently.

RBNZ In Hibernation

Stephen Toplis -

The RBNZ has sat firmly on its hands, as we had anticipated. In short, it did nothing, and intends doing nothing for a while yet. But, if it does do anything, it will be to increase the size of its Quantitative Easing (QE) programme rather than lower its cash rate.

Tourism Not Only Influence On External Accounts

Doug Steel -

New Zealand’s annual current account deficit stood at 2.7% of GDP in the year to March 2020. This was no surprise matching both market and our expectations. But it does continue the trend narrowing in the annual deficit over the past 18 months. The annual deficit was 3.0% of GDP for the year to December 2019. But we see enormous pressures – in both directions – over the coming year.

Limited Service

Doug Steel -

Activity in New Zealand’s services sector improved somewhat for May after its lowest ever result in April, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

The PSI for May was 37.2, which was 11.5 points up from April (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was just above the March result, but still showing strong contraction for the month.

BusinessNZ chief executive Kirk Hope said that the result for May was similar to that of the manufacturing sector, with improvements made but still well below anything considered business as usual.

“The proportion of negative comments for May (72.9%) did drop from 91% in April. Looking ahead, around two-thirds of June will be at level 1, so we would expect ongoing improvements in activity in the months ahead”.

BNZ Senior Economist Doug Steel said that “we’d caution that just being allowed to open doesn’t guarantee more activity. Standing back, there is no denying the outright level of the PSI remains woeful and still sits well below the lows at around 45 recorded during the 2008/09 recession”.

Road to Recovery

Craig Ebert -

New Zealand’s manufacturing sector showed some signs of recovery, albeit off a very low base, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for May was 39.7 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up 13.8 points from April, and higher than the level of activity recorded in March.

BusinessNZ’s executive director for manufacturing Catherine Beard said that given half of May was at alert level 2, this provided firms with a greater ability to boost production and new orders, which was seen in those two sub-indices showing the strongest increases from the previous month (sitting at 38.4 and 40.0 respectively). In contrast, employment (39.4) took another hit. With the wage subsidy to end soon for many businesses, a soft employment result in the months ahead may make the road to recovery that bit longer.

“Looking at comments, the lift in overall activity levels also saw the proportion of positive comments increase from 10.3% in April to 28.5% in May.”

BNZ Senior Economist, Craig Ebert said that “still, a negative tone remains evident in the fact that, even with its bounce in May, the NZ PMI merely got back to the sort of levels in sank to during the 2008/09 recession.”

BNZ/SEEK Employment Report

Craig Ebert -

With economic statistics being shaken by COVID-19 it is important to look at them in levels terms, not just rates of change. Job advertising on SEEK.co.nz provides a good example. It posted an encouraging jump of 72.3% in May. However, this was from the extreme low point it plumbed in April. So, even with its bounce May’s advertising was still far shy of what it was before the virus. Its level compared to May 2019 was down 58.2%, which puts things in perspective.

Business Survey Infers Stalled Recovery

Craig Ebert -

At face value, this afternoon’s ANZ business survey update, taken in early June, appeared to maintain the gradual-recovery message. But look closer and this didn’t bear up much at all in the detail, which instead gave a sense of stalled recovery.

Retail’s down, DOWN…and UP

Craig Ebert -

It was interesting to note the “mere” 0.7% decline in March quarter retail sales. More significant will be the plunge in the June quarter. More informative, however, will be the upcoming monthly, and particularly weekly, spending indicators. These will give a crucial steer on the degree of recovery as New Zealand continues to lower its COVID-19 lockdown levels.

Milk Price Possibilities

Doug Steel -

Global dairy prices have declined so far during 2020. This has followed from a material hit to demand as a result of COVID-19 and associated people movement restrictions, along with rising milk production in the EU and US. The way ahead is highly uncertain so we look at some scenarios and what these might mean for the 2020/21 milk price.

Out of service

Craig Ebert -

Activity in New Zealand’s services sector ground to a halt during April, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

The PSI for April was 25.9, which was 11.4 points down from March* (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). The April result was also the lowest level of activity since the survey began in 2007.

BusinessNZ chief executive Kirk Hope said that like its sister survey the PMI, the almost total lockdown of the country at level 4 meant most businesses were either significantly affected, or simply couldn’t trade at all during April.

“The proportion of negative comments for April stood at 91%, with COVID-19 the key word used throughout. Given the move to level 2 last week for most businesses, a return to higher levels of activity is expected looking forward. However, the social distancing restrictions that remain in place will still provide a brake for many”.

BNZ Senior Economist Craig Ebert said that “a sizable rate of contraction is what you get when businesses are forbidden from operating, especially those with a customer-facing focus. Covid-19 has seen to that, with policy responses reinforcing the sudden stop”.

*Due to not running the March 2020 PSI because of COVID-19, the March figures have been obtained by taking an average of both the actual combined February 2020 and April 2020 values. The results have then been seasonally adjusted.

Rock bottom

Doug Steel -

New Zealand’s manufacturing sector fell to its lowest level of activity since the survey began, according to the latest BNZ - BusinessNZ Performance of
Manufacturing Index (PMI).

The seasonally adjusted PMI for April was 26.1 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was down 11.9 points from March*. The previous low point had been 36.1 in November 2008, which was due to the Global Financial Crisis.

BusinessNZ’s executive director for manufacturing Catherine Beard said that given part of March and almost all of April was in complete lockdown for the country, a significant fall in manufacturing activity was fully expected. The key sub-indices of Production (19.8) and New Orders (17.8) were particularly hit hard.

“Looking at comments from respondents, only two words stand out, namely COVID-19 and lockdown, with
89.7% of respondents outlining negative comments”.

“With level 3 in place since 28 April, along with the country entering level 2 on 14 May, a greater sense of normality will hopefully be present for most manufacturers during the second half of May. This should see a return to relatively stronger levels of activity. However, to what extent the sector climbs out of rock
bottom will largely depend on the ability to get new orders up and running, along with revised factory floor processes for production”.

BNZ Senior Economist, Doug Steel said that “recent negative PMI readings from around the world illustrate the widespread economic pain being felt. New Zealand’s April reading is lower than other countries we often compare ourselves to, which tallies with suggestions that NZ restrictions have been tighter than
many”.

*Due to not running the March 2020 PMI because of COVID-19, the March figures have been obtained by taking an average of both the actual combined February 2020 and April 2020 values. The results have then been seasonally adjusted.

Lockdown lows

Craig Ebert -

Like the bulk of New Zealand’s economic indicators for April, job advertising fell dramatically. This was, of course, the month most impacted by the nation’s maximum-level economic and social lockdown. This level 4 lasted from 26 March to 27 April, after which level 3 came back into play. The 65.3% drop in job advertising in April, followed a 27.0% fall in March, making for an annual rate of decline of 75.4%.

NZ Budget: Still Rescuing Rather Than Recovering

Stephen Toplis -

Today, the Government announced the $50 billion of new spending we were expecting. This is in addition to the $12.1 billion delivered on March 17. Cumulatively, this amounts to a staggering 20% of GDP. Not surprisingly, it is reflected in skyrocketing fiscal deficits and soaring government debt levels, but that simply had to be the case under the circumstances. As staggering as these numbers are, New Zealand’s fiscal outlook still looks very favourable by international comparison. And rating agency Standard & Poor’s immediately gave the Budget the tick of approval. But financial markets didn’t seem to like the look of the massive funding programme that lies ahead, with yields across the curve pushing higher.

QE Remains RBNZ’s Go-To Tool

Stephen Toplis -

As expected, the centrepiece of today’s Monetary Policy Statement was the announcement of a huge expansion in the RBNZ’s quantitative easing programme (QE).
Indicative of the relative importance of QE in the Bank’s thinking is the fact that five of the six paragraphs in the key policy statement of the MPS referred to it. Only in the last paragraph, almost as an afterthought, did the RBNZ deign to mention the official cash rate.

New Zealand Construction Outlook

Stephen Toplis -

As we look to the future, one of the industry groups many people believe will provide an answer to all our problems is construction. Hopes are that both residential and non-residential activity can grow strongly. To us, though, the building sector provides a case study of just how expectations and reality might be quite different, in particular how the rising unemployment rate will circle back to prevent the very recovery in activity that is needed to create jobs.

BNZ Data Reveal Economic Pain

Stephen Toplis -

As a bank the BNZ has a mine of information at its fingertips as to how the New Zealand economy is faring. We get this data in real time so are very quickly aware of how things are changing. These data are particularly useful in getting to grips with the current environment with conditions changing dramatically and often. We have decided to share some of our findings with you and hope that it in some way assists in seeing your way through the chaos that abounds.

A Solid Pre-Covid Labour Market

Craig Ebert -

Sure, today’s Q1 labour market data substantively pre-date impacts from COVID-19. Nonetheless, they also confirm a starting point that was no worse than we estimated, and even more robust than we imagined in some respects. We have also taken good bearings from today’s RBNZ note on lockdown-level impacts on the economy. This also gels with our economic presumptions.

The Fiscal Impacts of COVID-19

Craig Ebert -

Even assuming a best-case prognosis on COVID-19 from here, it will, along with the responses to it, leave long and deep scars. This note dwells on the fiscal aspects of this. To cut to the “bottom line”, we can easily see gross government debt rising to double the amount forecast in December’s Half-Year Economic and Fiscal Update (HYEFU). So more in the region of $200b by 2023/24 (60% of GDP), rather than $100b.

From Rescue To Recovery – A New Zealand Chart Pack

Stephen Toplis -

As they say, “a picture is worth a thousand words”. With that in mind, please find attached our latest chart pack within which we have tried to illustrate, in a simple fashion, the major issues that confront the New Zealand economy, as we continue the fight against Covid-19. We hope you find this of some use.

Peak Pain

Doug Steel -

Today’s ANZ business survey largely confirmed what we already knew from the preliminary data – that the business environment was atrocious in April. Not surprising given that for many there wasn’t even a market place, or if there was, it was severely impeded by lockdown restrictions at alert level four. The data also confirmed, however, a glimmer of hope appearing toward the end of the month as a move to alert level three became possible.

Hiring Freeze

Craig Ebert -

In light of the major disruption being caused by COVID-19, it wasn’t surprising to see March job advertising fall as much as it did – 29.4% to be precise. This dwarfed February’s slippage of 7.7%, and reflected in an annual fall also in the region of 30%.

On Target Inflation Soon to be History

Doug Steel -

There are major macro forces along with some micro ones to consider regards the inflation outlook. To cut to the chase, the overarching outlook this year is downward. We expect next week’s Q1 annual CPI inflation to print a touch above 2%. Thereafter, we anticipate annual CPI inflation falling to and through the bottom of the RBNZ’s target band. The risk is that inflation falls further than we currently anticipate.

Financial Markets Wrap

Risk Assets Outperform Further In June

Jason Wong -

• The NZD rose by 4% in June and was the best performing of the majors, so was higher on all the key crosses
• Fuelled by further recovery in risk assets; global economic data improved considerably as lockdown restrictions eased
• Central bank bond buying restrained upward pressure on global rates; NZGBs underperformed on increased supply

Full Currency Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Further recovery in risk assets in May

Jason Wong -

• Reduced concern about the spread of COVID19 and the reopening of economies supported risk assets in May
• Commodity currencies outperformed, led by the AUD
• RBNZ’s aggressive QE policy kept NZ rates suppressed, with fresh record lows intra-month

Full Currency Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

NZD Recovers In April

Jason Wong -

• Reduced growth in cases and deaths from COVID-19 sees risk assets recover strongly in April after their beating in March
• AUD outperforms strongly, seeing NZD/AUD weaker, but NZD/USD recovers 3%
• NZ rates fall to record lows with the RBNZ in charge of the market

Full Currency Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Interest Rate Strategy

An Initial Look at RV on the NZGB May 2041

Nick Smyth -

Late last month, New Zealand Debt Management (NZDM) said it intended to syndicate a new May-2041 maturity NZGB in the week of 13th July. The May-2041 will be the longest bond on the curve, extending it by four years from the Apr-2037.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Outlook for Borrowers: Post-June Monetary Policy Review

Nick Smyth -

As universally expected, the RBNZ kept the OCR at 0.25% at the June Monetary Policy Review. The RBNZ had previously said that it would not consider any move in the OCR until March next year, at the earliest.

Despite the earlier-than-expected shift to COVID-19 Alert Level 1, the RBNZ remains cautious about the economic outlook. The balance of risks for the economy are still perceived to be to the downside.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

NZGB Supply Update

Nick Smyth -

NZDM has released its bond tender schedule for the month of July, the first month of the 2020/21 fiscal year. The key announcement is that NZDM plans to syndicate a new May-2041 nominal NZGB in the week of the 13th July. This is the first long-dated (15yr+) syndication since 2016.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

RV Analysis Of The NZGB May 2024

Nick Smyth -

NZDM today launched its new May-2024 bond syndication. The coupon on the bond is set at 0.5% and initial price guidance has been set at +9-12bps above the Apr-23. The bond is expected to price tomorrow (NZT). NZDM said it expects to issue “at least” $2b. This was the same size guidance NZDM provided before the May-31 syndicated tap in early April, in which it printed $3.5b.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Trade idea: NZGB 2025/2033 Steepener

Nick Smyth -

The short-end of the NZ curve has experienced a marked re-pricing since the aftermath of the May MPS. The market no longer prices a negative OCR for next year and rate cut pricing for 2020 has been significantly pared back. The repricing at the short-end of the NZ curve can be attributed to comments from RBNZ officials last month that suggest it is highly unlikely to cut the OCR before March next year and the faster-than-expected move to COVID Alert Level 1 in New Zealand (which entails few restrictions besides the border remaining closed). The terminal OCR is now priced around 0.05%.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

NZDM Issues A Record $7b Via May-2024 Syndication

Nick Smyth -

Earlier today, NZDM issued a record $7b of its new May-2024 NZGB. For New Zealand, the deal is enormous. It is twice as big as the previous largest syndication (the $3.5b syndicated tap of the May-2031 in early April this year). For context, the $7b size is as large as the entire 2017/18 bond programme was.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

What To Make Of RBNZ Tapering?

Nick Smyth -

Over the past month, we have been arguing that RBNZ QE was running at an unsustainably fast pace.1 For four weeks, between 20th April and 15th May, the RBNZ maintained a $1.35b per week purchase target for nominal NZGBs. Had it maintained purchases at this pace, it would have accumulated over $80b nominal NZGBs by June next year, or around 70% of the market. This would have breached the 50% limit on its holdings of nominal NZGBs, as set out in the indemnity from the Minister of Finance (which would have been reached around the turn of the year). For us, the only question was when the RBNZ would slow its purchase pace.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

NZGB June supply outlook

Nick Smyth -

NZDM has announced its bond tender schedule for the month of June. The weekly pace of tender issuance remains at $1.05b and the split of bonds per tender is exactly the same as May. All bonds will be tendered during the month except for the May-2021 and the May-2031. There are four weekly tenders listed for the month, but one will be cancelled the week of the May-2024 bond syndication.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

One month into QE – just who was selling to the RBNZ?

Nick Smyth -

Earlier this week, the RBNZ released the breakdown of investor holdings for NZGBs for April. This is the first real snapshot of the market post RBNZ QE (which started on the 25th of March). Here are the key takeaways.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Potential NZGB Inclusion In Global Bond Indices

Nick Smyth -

New Zealand is a high credit quality market (AA+/Aaa) but has historically failed to meet most benchmark providers’ eligibility criteria based on market size. That is set to change over the coming few years, with the NZGB market set to grow enormously. Based on forecasts from New Zealand Debt Management (NZDM), the nominal NZGB market will grow from the current $65b (US$40b) to around $120b (US$72b) by June 2021 and around $200b (US$120b) by June 2024.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

The Antipodean Paradox

Nick Smyth -

In late April, we published a note arguing that the more aggressive nature of RBNZ QE compared to the RBA’s YCC would drive further NZGB-ACGB spread compression (see NZGB-ACGB Spread Outlook – RBNZ QE To Drive Further Compression). The move has played out quicker, and to a greater extent, than we had anticipated. The 10-year spread in swaps has compressed by around 20bps and the NZGB-ACGB 2037 spread by around 40bps (see Chart 1). We think the move is now overdone and risk-reward favours NZGB-ACGB wideners.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Outlook for Borrowers: Post-May MPS

Nick Smyth -

As widely expected, the RBNZ kept the OCR at 0.25% at the May MPS. The RBNZ chose to add more stimulus by increasing its Large-Scale Asset Purchase programme (otherwise known as quantitative easing, or ‘QE’) from the current $33b to a maximum of $60b. Through this QE programme, the RBNZ buys government and local government bonds in order to force down longer-term interest rates in New Zealand.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

QE Has Its Limits – The Importance Of The 50% Cap For Nominals

Nick Smyth -

After yesterday’s bond programme announcement from NZDM, there has been speculation that the RBNZ will just increase the size of its QE programme, to absorb the increase in bond supply and limit any upward move in longer-term interest rates.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

RBNZ Review – Bond Market Implications

Nick Smyth -

The lead-up to the meeting was dominated by speculation the Bank could soften its forward guidance, giving itself the option to cut the OCR to negative later in the year. Immediately prior to the decision, the market was pricing the November meeting at 0.05%, implying 20bps of cuts by the end of the year.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

NZDM trumps RBNZ

Nick Smyth -

NZDM announced a record $60b bond programme for the coming fiscal year (ended Jun-2021). This is $50b higher than the previous forecast from December’s HYEFU. In net terms, issuance will be close to $50b in the coming fiscal year (~20%/GDP).

Bond issuance was significantly increased for future fiscal years as well. Net issuance in FY21/22 was increased from $8b to $40b. The NZGB market is now forecast to be $213b in Jun-2024 compared to just $87b at the time of the December HYEFU.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Bond Programme Preview

Nick Smyth -

NZDM releases its bond programme on 14th May, alongside Budget 2020.

The market’s primary focus will be on the size of the programme over the coming 12 months. We have pencilled in a bond programme of $50b for FY20/21 (~$39b net issuance), although this is subject to considerable uncertainty.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

RBNZ May MPS – What We Expect For The Bond Market

Nick Smyth -

Gone are the ‘old days’ when the RBNZ decision came down to a single number (the OCR) and the market would react to that and the tone of the accompanying commentary. With the RBNZ now active in the bond market, there are a number of different dimensions to RBNZ policy.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

NZGBs – tender Issuance Increased, 2024 Syndication Planned, Direct Monetary Financing

Nick Smyth -

This afternoon, New Zealand Debt Management (NZDM) released its bond tender schedule for the month of May. The weekly pace of bond tenders will step-up to $1.05b per week, from $800m this month. But total bond issuance will be lower in May ($4.2b vs. $6.7b) as there is no syndication planned for next month.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

NZGB-ACGB Spread Outlook – RBNZ QE To Drive Further Compression

Nick Smyth -

NZGB-ACGB spreads have compressed this year. At the start of the year, NZ had both a higher cash rate (1% vs. 0.75%) and term structure. The convergence in the RBNZ and RBA cash rates to 0.25% has helped drive spread compression in NZGBs and ACGBs. Our expectation is that RBA and RBNZ policy rates will be on hold, at this level, for the foreseeable future (we think it’s unlikely the RBNZ will cut the OCR to negative despite Governor Orr reiterating it remains a possibility down the line). Therefore, relative government bond supply and QE policies will have a greater bearing on long-end NZGB-ACGB spreads going forward.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Negative Interest Rates In New Zealand – Still Unlikely?

Nick Smyth -

Back in mid-March – which feels like a long time ago now – RBNZ Governor Orr outlined the Bank’s playbook for unconventional policy. He indicated his preference for using a negative OCR as a first step into unconventional policy. Quantitative Easing (‘QE’) was further down the list.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Could Yield Curve Control come to New Zealand?

Nick Smyth -

There have been suggestions that the RBNZ might adopt a Yield Curve Control (YCC) framework, similar to that currently in operation in Japan and Australia. In this note we describe what YCC is, what it intends to do, and whether its practical in a New Zealand context.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Direct Monetary Financing: Could The RBNZ Bypass The Market And Buy Straight From NZDM?

Nick Smyth -

Last week, we heard that the Bank of England (BoE) and UK Treasury had agreed to an extension of the UK government’s ‘Ways and Means’ facility. This is essentially the overdraft facility that the government has at the BoE. It allows the UK government to draw down on funding directly from the BoE, without needing to use the market.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

An Early Look At The RBNZ QE Programme

NIck Smyth -

In this note, we take an early look at the results of the RBNZ’s QE buybacks to date and how the RBNZ’s QE programme stacks up compared to those of other central banks and NZDM issuance.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Markets Outlook

Holding Up

BNZ Research -

We continue to monitor many high frequency data series to help gauge the very latest changes in economic conditions. Recent readings, across several indicators, have shown a general theme of holding up reasonably well, especially given the circumstances.This spans areas such as housing, commodity prices, external trade, domestic spending, and employment. But there are caveats. We also look at how the unemployment rate will be influenced by labour force participation rate and what Australia’s experience might be telling us.

Mindful of Labour Market Measurement

BNZ Research -

There is a decent chance New Zealand’s near-term labour market data paint a picture of resilience to the ravages of COVID-19. However, interpretation will need to be mindful of measurement issues, and timing.

RBNZ OCR Review

BNZ Research -

This week’s RBNZ OCR review should be singularly unexciting. As far as we are concerned, the very best thing the RBNZ could do is simply leave everything where it is. For now, things seem to be ticking along in the manner you would expect and there is insufficient evidence to stop the RBNZ from sitting very firmly on its hands.

Global Outlook A Galeforce Headwind

BNZ Research -

New Zealand may be Covid-free (for now at least) but the rest of the world certainly is not. Nor will it be so for a very long time. Given that exports account for almost a third of our GDP, the preponderance of the illness across the planet will continue to be a limiting factor on our economic expansion for the foreseeable future, even as economies elsewhere begin to open up.

Recovery Builds Momentum

BNZ Research -

We think the move to Level 1 will provide the economy a significant boost. For the vast majority of us there will be little difference in our day to day activity as we emerge from Level 2 but we think the confidence impact will be tangible. Confidence has a huge impact on both consumer spending and investment activity. And there is already some evidence of household expenditure picking up in excess of our expectations.

Looking Up Out Of The Hole

BNZ Research -

More than a week with zero new COVID cases, and just a solitary active case, gives obvious grounds for optimism. So too does the gradual easing of previous restrictions including last Friday’s move to allow gatherings of up to 100 people (up from 10 previously). With the recent movement down alert levels, and with restrictions beings relaxed, it is no surprise to see many timely indicators showing marked improvement. Further gains are expected with a move to alert level 1 getting closer by the day. Meanwhile, job losses reflect the damage done.

Unbearable! Australia Out In Front

BNZ Research -

There’s a lot of discussion about the relative economic performance of New Zealand and Australia. So far, most economic indicators we look at suggest Australia is going to come through the current shock in a better state than ourselves. We have little reason to question that conclusion. However, we are less inclined than some to put the “blame” for this on the decisions of policymakers.

April’s Plunge from Q1 Cliff

BNZ Research -

With last week’s Monetary Policy Statement and Budget all said and done, this week’s focus will return fairly and squarely on the economic data. Friday’s retail trade report might take a bite out of thoughts of a steady Q1 GDP. And, the range of data for April will hammer home the maximum lockdown that the country went into that month.

Level Shift No Cure All

BNZ Research -

Moving through the levels is cause for hope. But we caution there is a very long way to go yet. Partial indicators are now starting to reveal the full impact of the economic slowdown and we fear that even a move to Level 2 will not provide the boost the economy so badly needs. Thursday’s Budget will shed light on the Government’s next steps while the RBNZ should confirm its intent to fund those same steps in its May MPS.

MPS Preview – RBNZ Can’t Save The World

BNZ Research -

In our opinion, the most appropriate way of approaching the cash rate in the current environment would be for the RBNZ to flat-line, at 0.25%, its OCR track for an extended period. More stimulus can, and will, be provided via a further expansion of the central bank’s balance sheet to cater for the ongoing increase in funding demands by government.

Growth lower for longer

BNZ Research -

Moving to Level 3 signals the beginning of the recovery but there’s a very long way to go. One of the factors that will constrain the medium-term expansion is much lower population growth. We think the impact of this is being underestimated by many. At the same time, we think the risk of the RBNZ pushing its cash rate into negative territory is being overestimated.

A Small Step In The Right Direction

BNZ Research -

New Zealand has reduced its Covid-19 containment status to Level 3 from Level 4 but this will not happen until April 27, almost a week later than many had hoped. This will potentially enable around 500,000 people to return to work and increase the amount of goods that New Zealanders can order online. It’s a positive step but, alas, it was never going to be enough to prevent a spike in the unemployment rate, a permanent loss in economic activity and a correction in the housing market.

Realism Required

BNZ Research -

As New Zealand inches toward a less restrictive containment regime, it is imperative all and sundry recognize progress from here on will be glacial, surrounded in deep uncertainty and prone to the occasional big step backwards. Moreover, the environment in which we operate will not return to anything like normality for a very long time. Even when we do reach a new steady state that state might be quite different to the one we entered the battle against Covid-19 with.

Markets Today

BNZ Markets Today

Doug Steel -

Markets largely remain in a holding pattern. US equity indexes are marginally higher, so to US 10-year Treasury yields. Commodity prices and currencies are up, while the US dollar is weaker.

BNZ Markets Today

Doug Steel -

The was a consolidation of risk appetite overnight. Equity markets are generally lower, led by Europe, while the USD is marginally higher. US interest rates have edged lower.

BNZ Markets Today

Jason Wong -

Risk assets are higher, driven by a surge in Chinese equities as the government encouraged a bull market, with the move spilling over into other markets. The USD is broadly weaker, while the NZD and AUD have pushed higher, although without much follow-through overnight.

BNZ Markets Today

Jason Wong -

With US markets closed for Independence Day on Friday, financial markets saw a quiet end to last week. European equities and S&P futures were on the soft side, while the NZD and AUD ended the week on a positive note.

BNZ Markets Today

Nick Smyth -

A strong US nonfarm payrolls report has given equities another push higher overnight, although there has been less movement in other asset classes. Global bond yields are flat-to-lower overnight and currency changes have been minimal. The NZD has been the big outperformer over the past 24 hours, rising above 0.65.

BNZ Markets Today

Jason Wong -

The third quarter has kicked off on a positive note for risk appetite, with modest gains in European and US equity markets, higher global rates and the NZD pushing higher against a backdrop of a soft USD and other safe-haven currencies.

BNZ Markets Today

Jason Wong -

Markets are ending Q2 with a risk-on feel, taking equity markets higher, while US Treasury yields have been pushed up a few basis points. The NZD and AUD have traded a wide range, more than recovering lost ground made yesterday evening.

BNZ Markets Today

Jason Wong -

Global equities have rebounded after the very weak Friday session, helped by a lack of negative news. Currency movements have been small to start the new week and Treasury yields have traded a tight range overnight.

BNZ Markets Today

Nick Smyth -

Equities fell sharply and global rates declined on Friday as the continued rapid spread of COVID-19 in several US states heightened concerns that the US economic recovery could be put at risk. The NZD held in well despite the risk-off backdrop on Friday.

BNZ Markets Today

Niick Smyth -

It’s been a choppy trading session overnight, but with little net change in equities, rates and currencies.

The market remains focused on the rapidly rising number of new COVID-19 cases in several Southern and Western US states. The Texas Governor announced last night that he would “temporarily pause” plans to further reopen the state’s economy amidst what he termed a “massive outbreak” in the region. The state cancelled all elective surgery as Houston, the biggest city in the state, reached capacity with ICU beds. This follows similar moves in North Carolina, another affected state, which said the previous night it would pause its re-opening for three weeks and ordered masks be worn in public. At a national level, the US reported its highest single day rate of new COVID-19 cases on Wednesday, at over 45,000.

BNZ Markets Today

Jason Wong -

Risk assets have been hit by a number of negative headlines, seeing chunky falls in global equities in the order of 2-3%. Commodities currencies have underperformed, with further weakness in the NZD following its losses seen after yesterday’s RBNZ monetary policy review.

BNZ Markets Today

Jason Wong -

Risk appetite has improved, supported by stronger PMI data across Europe, seeing global equities up over 1% and USD weakness, helping the NZD and AUD break higher, with the NZD up through 0.65.

BNZ Markets Today

Nick Smyth -

It’s been a positive start to the week for risk assets with US equities and commodities making gains. The NZD and AUD have risen sharply, with the NZD approaching 0.65 this morning. Global rates are little changed.

BNZ Markets Today

Nick Smyth -

US equity markets gave back some of their weekly gains on Friday as Apple announced it was closing some stores in those US states which have seen an increase in COVID-19 cases. Risk sensitive currencies, including the NZD and AUD, fell, in-line with moves in equities. The RBNZ said on Friday that it would taper its QE bond buying for the week ahead, which steepened the government bond curve.

BNZ Markets Today

Jason Wong -

There’s a mild risk-off tone to the market, with safe-haven currencies in the box seat and generally lower global bond rates. US equities have spent much of the session in modest negative territory. The NZD and AUD have shown modest falls overnight.

BNZ Markets Today

Nick Smyth -

Market moves have been muted overnight. Equity markets have eked out small gains, global rates are little changed and currency moves have been modest. The ECB’s TLTRO takes place tonight along with the BoE monetary policy meeting, at which it is expected to boost its QE bond buying programme.

BNZ Markets Today

Nick Smyth -

Market sentiment remains positive, with equity markets have extended their gains from yesterday while global rates have moved higher and curves steeper. The USD is broadly stronger after a much better-than-expected retail sales release although most currency moves have been modest. Yesterday, New Zealand Debt Management raised a huge $7b via its May-2024 bond syndication, a record amount for a New Zealand deal.

BNZ Markets Today

Jason Wong -

Yesterday, S&P futures were pointing to a very rough overnight session, but that hasn’t been the case, with a significant turnaround that sees risk assets well bid. The S&P500 is up about 1% and the NZD and AUD have recovered overnight, against a backdrop of a weak USD.

BNZ Markets Today

Jason Wong -

After the plunge on Thursday, risk appetite recovered on Friday, with US equities up over 1%, the US 10-year rate nudging higher and commodity currencies regaining some poise.

BNZ Markets Today

Jason Wong -

Turmoil has returned to markets, with a plunge in global equity markets and oil prices, a strong rally in government bond markets and safe haven currencies outperforming. The NZD is down over 1.7% for the day, while the AUD’s fall exceeds 2%.

BNZ Markets Today

Jason Wong -

US bond and equity markets have been supported by the FOMC statement this morning which reaffirmed the Fed’s commitment to keep the “pedal to the metal” to support the US economy. The S&P500 is back into positive territory, the US 10-year rate is down 8bps to 0.74% and the USD is weaker. The NZD and AUD have benefited from higher risk appetite, seeing fresh multi-month highs printed.

BNZ Markets Today

Jason Wong -

It has been another quiet day of newsflow and markets are mixed, with global equity markets generally lower, US Treasuries lower in yield with a flattening bias and the USD on track to record its ninth consecutive daily fall, although there’s a risk-off feel, with the NZD and AUD on the soft side.

BNZ Markets Today

Jason Wong -

There has been no fresh news to derail the bull run in equity markets or the selling pressure in the USD. The NZD and AUD have pushed on higher, while JPY has reversed a lot of last week’s losses. After last week’s big bond market sell-off, global rates have edged lower.

BNZ Markets Today

Jason Wong -

The US employment report Friday night was significantly better than expected, setting the tone for markets, culminating in a strong rise in US and European equity markets and a chunky rise in global rates. The currency market was mixed, but with a fairly modest reaction to the report overall. Earlier gains in the NZD and AUD were sustained, while EUR and JPY were on the weaker side of the ledger.

BNZ Markets Today

Jason Wong -

Global equity markets have taken a pause after their recent strong rally, but even so, the USD remains under pressure – even with US rates rising more than others. The NZD and AUD have printed fresh highs, while EUR has surged higher as the market embraces the news on increased policy support to drive an economic recovery.

BNZ Markets Today

Nick Smyth -

Risk asset markets have continued to rise overnight on growing hopes for a global growth rebound later this year. Equity markets are higher again, risk-sensitive currencies (including the NZD) have appreciated, and global rates have increased.

BNZ Markets Today

Jason Wong -

The NZD and AUD have extended their rallies, alongside emerging market currencies, as traders back the global economic recovery story. Global equity markets also remain well bid, while in the risk-on environment the global rates market remains well contained by central bank buying.

BNZ Markets Today

Nick Smyth -

Markets continue to trade with a risk-on tone as investors concentrate on the prospect of economies reopening and global growth rebounding later this year. Equities, commodities and growth-sensitive currencies have all made gains since the end of last week. The USD has continued to fall amidst declining risk aversion. The NZD is approaching 0.63, its highest level since mid-March.

BNZ Markets Today

Nick Smyth -

Equity markets have continued to push higher overnight on growing market optimism that the global economy has passed the turning point. The risk-on backdrop has led to a further fall in the USD. The NZD is back above 0.62 this morning.

BNZ Markets Today

Jason Wong -

Global equity markets are higher, with optimism on the economic recovery and policy stimulus more than offsetting rising US-China tensions, with the latter more an influence on weaker NZD and AUD currencies, alongside further sign of China-Australian trade tensions.

BNZ Markets Today

Jason Wong -

Risk sentiment is notably higher, driving up global equity markets, bond rates and commodity currencies, while the USD is the weakest of the majors. After the long weekend in some countries, investors are feeling optimistic about the outlook, driving up equity prices. The S&P500 has blasted up through the 3000 level for the first time since early March and is currently up near-2%, following a more than 1% gain for the Euro Stoxx 600 index. For the S&P500, for a change IT and Health Care stocks are dragging the chain, with the rally led by Financials and economically-sensitive sectors such as Industrials and Materials, positive sign. In Europe, travel and leisure stocks led the gains in response to moves by Germany and Spain to lift their travel restrictions.

BNZ Markets Today

Jason Wong -

Markets are very quiet with the UK and US on holiday. S&P futures are up over 1% and Treasury futures are little changed. Currencies have barely moved since the new week began, seeing the NZD trade near 0.61 and the AUD near 0.6545.

BNZ Markets Today

Nick Smyth -

Despite mounting US-China tensions, including over Hong Kong, equity markets made modest gains on Friday. There was again little change in global rates. The NZD fell, along with other commodity currencies, and ended the week below 0.61. The RBNZ said it would slightly taper its bond-buying for the week ahead although NZ rates were little moved by the news. It’s a public holiday in both the US and UK today so markets should be very quiet.

BNZ Markets Today

Nick Smyth -

US-China tensions have weighed on equity markets overnight, although the moves (S&P500 -0.7%) have been reasonably modest. The NZD has fallen amidst the more cautious risk sentiment.

BNZ Markets Today

Jason Wong -

Risk sentiment is positive again, with global equity markets higher and the NZD and AUD continuing to push higher. The rates market hasn’t really joined in, with government bond yields flat to slightly lower overnight.

BNZ Markets Today

Jason Wong -

There hasn’t been much follow-through from yesterday’s surge in equity prices, with the S&P500 only slightly higher, following a 0.6% fall in the Euro Stoxx 600 index, while global rates are slightly lower. However, the currency market is trading like risk appetite is notably higher, with the NZD and AUD near the top of the leaderboard and safe-haven currencies underperforming.

BNZ Markets Today

Jason Wong -

The new week has begun with much stronger risk sentiment, supported by the opening up of countries from lockdowns and hope for a new vaccine to fight COVID19. US and European equities are up in the order of 3-4%, global rates are higher and the NZD and AUD are near the top of the leaderboard.

BNZ Markets Today

Nick Smyth -

Equity markets made modest gains on Friday despite US-China tensions picking up further. There wasn’t much reaction to record falls in US industrial production and retail sales, with global rates edging higher. The NZD was the worst performing G10 currency on Friday’s session and the week itself. NZD/USD closed at a three-week low around 0.5935 and NZD/AUD at a six-month low around 0.9250.

BNZ Markets Today

Jason Wong -

It has been a mixed trading session overnight, with bond and currency markets adopting a cautious tone, but US equities rebounding (to flat) after a poor start. The NZD has drifted a bit lower – not much, but enough to take it down to its lowest level in a few weeks.

BNZ Markets Today

Jason Wong -

Negative risk sentiment has extended into another trading session, with weaker equity markets and lower global rates. Safe haven currencies have showed some modest outperformance, taking the NZD sub 0.60, but with no further damage to most of the crosses overnight, after yesterday’s post MPS lurch lower.

BNZ Markets Today

Jason Wong -

Markets have taken on a slightly more cautious tone overnight, seeing US equities down moderately and lower global rates. Currency moves have been modest, with a hint of GBP weakness alongside a broadly softer USD.

BNZ Markets Today

Jason Wong -

The week has begun with a mild risk-on tone, with US equities showing modest gains and the VIX index continuing to trend lower, down to a fresh two-month low, while global rates are higher. Currency markets have bucked the trend, with the USD outperforming, taking the NZD back well below 0.61. Oil prices are weaker despite some surprise production cuts announced.

BNZ Markets Today

Nick Smyth -

Equity markets finished last week on a strong note, despite nonfarm payrolls revealing a record loss of US jobs in April. US rates moved higher after the Fed said that Chair Powell will make a speech this week – markets expect Powell to push back on recent speculation that the Fed is considering negative interest rates. The NZD benefited from the risk-on backdrop, ending the week above 0.61. It’s a big week in New Zealand ahead with the Government announcing today when the country will move to Covid Level 2, the RBNZ’s eagerly anticipated Monetary Policy Statement on Wednesday and the Budget on Thursday.

BNZ Markets Today

Nick Smyth -

Equity markets have had another good night overnight (S&P600 +1.2%). The big news has been in the US rates market, where the market has, for the first time, started to price a negative Fed funds rate (-0.02% by the end of the year). The USD has fallen broadly amidst the fall in US rates. The NZD and AUD are up around 1.2% over the past 24 hours.

BNZ Markets Today

Nick Smyth -

US equity markets have risen overnight, led again by the tech sector, as investors look ahead towards the gradual reopening of economies. Bond yields have increased, and curves steepened, after the US Treasury announced a larger-than-expected increase to longer-dated bond issuance. NZ rates finally backed-up yesterday, with government bond yields rising by up to 10bps. The NZD has moved lower and sits this morning just around 0.6020. Finance Minister Robertson speaks at midday and he may provide some policy announcements ahead of the Budget next week.

BNZ Markets Today

Jason Wong -

We’ve back to a risk-positive tone, with higher global equity markets overnight. Currency movements haven’t been particularly significant, although CHF and EUR are notably weaker.

BNZ Markets Today

Jason Wong -

The new week has begun with mildly weaker risk sentiment. This sees global equity markets lower and the USD and JPY in demand, although the AUD and CAD haven’t been negatively affected by the more cautious tone.

BNZ Markets Today

Nick Smyth -

Equity markets fell on Friday as the market digested disappointing earnings results from Apple and Amazon and suggestions that Trump could reignite the trade war with China. Commodity currencies fell sharply, with the NZD down 1% on Friday to around 0.6060. There was another sharp fall in NZ rates last week, as the RBNZ kept the foot on the throttle with bond buying.

BNZ Markets Today

Jason Wong -

A slight risk-off feel has pervaded markets for the last day of trading for the month of April, with global equities weaker and global rates lower. Commodity currencies have underperformed overnight, but the NZD is the best of the pack and is hanging in there around 0.6140.

BNZ Markets Today

Nick Smyth -

Equity markets have risen strongly overnight (S&P500 +3%) after news that Gilead Sciences’ remdesivir drug had shown positive results in government-run trials. Risk sensitive currencies have outperformed, with the NZD leading the way in the G10, and commodity prices have increased.

BNZ Markets Today

Jason Wong -

It has been a fairly uneventful overnight session, but notably the USD shows broadly based losses, while commodity currencies have outperformed. This sees the NZD regain its losses seen during the local trading session, following a sharp fall in domestic interest rates. US Treasury yields have pushed lower, with the 10-year rate reversing course and heading back down towards 0.60%.

BNZ Markets Today

Nick Smyth -

Equity markets have performed well over the past two sessions as countries look to ease up containment measures for COVID-19. Offshore government bond yields have pushed a little higher. Risk sensitive currencies have outperformed, especially the AUD. The NZD/AUD cross has reached its lowest level since mid-November. NZ is officially in in COVID Level 3 today.

BNZ Markets Today

Jason Wong -

There has been plenty of news to digest overnight but market movements have been well-contained by recent standards. Commodity currencies have been well supported, with better price action in the oil market helping.

BNZ Markets Today

Nick Smyth -

Equity markets have bounced back from yesterday’s falls, with US benchmarks up 2-3% overnight. Oil prices have also recovered. Bond yields have risen in sympathy with the improvement in risk appetite but remain at very low levels. Currency moves have been restrained although, notably, the NZD/AUD cross has fallen again, to its lowest level since mid-November.

BNZ Markets Today

Jason Wong -

Risk sentiment has soured, not helped by the focus on the oil market, which is seeing a further plunge in pricing. Equity markets are down 2-4% and the US 10-year Treasury yield has fallen to the bottom end of its range for the past month. Yesterday’s fall in the NZD to below 0.60 has extended overnight, while the AUD has slipped further below 0.63.

BNZ Markets Today

Nick Smyth -

There has been an almost unbelievable fall in the US West Texas oil price overnight, with the soon-to-mature futures contract trading to as low as -$40 per barrel (minus forty dollars). A glut of oil, lack of physical storage capacity and technical factors related to the May futures contract expiry are all at play. Broader markets haven’t been overly affected by the fall in oil prices – US equities have fallen 1-2%, bond yields are little changed and the CAD and NOK have fallen, but only by about 1%. In NZ, the PM said the Covid Level 4 lockdown should end next Tuesday, which has boosted the NZD. The NZD has been the best performing currency in the G10 over the past 24 hours.

BNZ Markets Today

Jason Wong -

Market sentiment ended the week on a positive note, seeing strong gains in equity markets. Commodity currencies outperformed during the local trading session, amidst a broadly based fall in the USD, with a mild extension of the moves in the overnight session.

BNZ Markets Today

Nick Smyth -

Market movements have been a bit more subdued overnight. The S&P500 and NASDAQ have made modest gains while bond yields have continued to grind lower. Economic data remains abysmal but this has been overlooked by markets. The USD has increased strongly for the second day running, taking the NZD down to around 0.5950.

BNZ Markets Today

Jason Wong -

Risk sentiment has soured, evident in lower equity markets, lower US Treasury yields and broadly based USD strength, with the commodity currencies significantly underperforming.

BNZ Markets Today

Nick Smyth -

Equity markets have pushed higher overnight (S&P500: +3%) as the market digests the extraordinary policy response from governments and central banks. Trump is expected to make an announcement on plans for reopening the US economy in the coming days. The risk-on backdrop has led to a fall in the USD, although the NZD has underperformed overnight. There was more fiscal assistance announced by the NZ government this morning, including a $3.1b tax loss carry-back scheme.

BNZ Markets Today

Jason Wong -

US equities have begun the new week on a soft note, with nervousness evident as focus turns to the earnings season which soon kicks into gear. Since the NZ close pre-Easter, the AUD and NZD have significantly outperformed, against a backdrop of a soft USD, following the Fed’s unleashing of further extraordinary policy measures.

Rural Wrap

Relative Optimism and the NZD

Doug Steel -

Economic developments with implications for NZ’s primary sector continue to come thick and fast. After months of seemingly only downside risks to navigate, there are at least a few things starting to move in the right direction. There may still be a long way to go, with many risks and issues remaining but, as the Chinese proverb says, a journey of a thousand miles begins with a single step.