The New Zealand dollar rallied and bond yields gained after December quarter jobs data came in much stronger than expectations.
Today’s release, which showed employment fell to 4.9 per cent in the quarter against market expectations of 5.6 per cent, follows news last month that the consumer price index rose by 1.4 per cent over 2020 – well above market expectations.
Both sets of data show the Reserve Bank is nearing its dual mandates of maintaining inflation within in a 1 to 3 per cent annual range – with a 2 per cent midpoint – while achieving maximum achievable employment.
It also raised the question as to why the Reserve Bank is being so pro-active in keeping interest rates low through its bond-buying programme at a time when the real estate market is running hotter than ever.
Market expectations are that the Reserve Bank’s official cash rate will fall no further than its current record low of 0.25 per cent and the market is starting to price in rate hikes in 2022.
Interest rates at the longer end of the yield curve have been on a roll since late last year.
After today’s data the New Zealand dollar rallied to just over US72c from US71.60c just before the release.
The two-year swap rate rose by six basis points to 0.38 per cent – the highest since April last year.
Further out, the 10 year swap rate jumped by 12 basis points to 1.39 per cent – the highest point in a year and more than triple the 0.46 per cent recorded last October.
The Reserve Bank has been proactive in keeping interest rates low through its bond buying, even though it has cut back substantially from the initial target of $1.8 billion a week.
This week the bank is scheduled to buy back $570 million in bonds compared with the Government’s issuance of $450m to $500m a week.
Bank of NZ strategist Jason Wong noted the CPI was much stronger than expected over 2020 and that today’s jobs data was the “second leg of the double” in terms of bringing the Reserve Bank closer to its mandated inflation and employment goals.
“Now we have 4.9 per cent unemployment, which is much lower than anyone could have imagined three to six months ago,” he said.
“The market is questioning why the Reserve Bank is buying bonds every week to keep interest rates suppressed – giving out cheap money to banks to lend to the housing market,” Wong said.
“It raises questions as to the Reserve Bank’s likely strategy from here,” Wong said.
“How much more stimulus does the country actually need when the economy has done pretty well?”
“The Reserve Bank is still buying in excess of what is being issued, (excluding syndications) drawing bonds out of the public sector hands to drive interest rates lower,” Wong said.
Complicating matters this week is the Government’s $2b-$4b syndicated bond offer, which will be priced tomorrow.
The increase in bond supply arising from the offer, and today’s data, is likely to put upward pressure on bond yields – exactly what the Reserve Bank does not want.
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