New Zealand Bond Markets Could Face an October RBNZ Surprise

(Bloomberg) -- New Zealand interest rate markets are expecting the nation’s central bank meeting to do next month what it didn’t in August -- hike rates by 25 basis points. In fact, an even larger increase could be on the cards. 

A hawkish sounding Reserve Bank of New Zealand as well as Prime Minister Ardern’s decision to lift a national lockdown outside largest city Auckland have already buoyed the nation’s yields. The 10-year tenor rose above 2% last week to touch its highest level since April 2019. To top that off, data due this week should show a booming economy ahead of the lockdown, with second-quarter gross domestic product data slated to rise 16.1% year-over-year.

New Zealand rates markets are now fully pricing in a 25 basis-point rise by the nation’s central bank in October, and another tightening at the November meeting. They are also ascribing a 4% probability to a 50 basis-point rise next month. 

“With Covid case numbers in New Zealand stabilizing at lower levels over recent days, 25 basis point rate hikes in October and November are now fully priced,” says Andrew Ticehurst, rate strategist at Nomura Australia Ltd in Sydney, Australia. “Indeed, if those numbers continue to grind lower over the next few weeks, the possibility of a 50 basis point move by the RBNZ on October 6 should not be completely written off.”

Assistant RBNZ Governor Christian Hawkesby certainly appeared to leave open the option of a larger increase in an interview last month. Asked if a 50-point hike would be on the table in October, he said it would come down to “how far away are we from where we think we need to be” and “what have we learned about the economy in the meantime.” 

Of course, the third quarter will be different story, with an economic slowdown inevitable given the Auckland lockdown, already into its fourth week. But once those are eased, the nation’s economy should rebound quickly and resume its strong underlying trajectory. 

The RBNZ has caught interest rate investors off guard before, as it did in August when it left rates unchanged after a local Covid case sparked a national lockdown.  If Auckland’s virus instructions are loosened soon, the probability of a 50 basis points increase would appear greater than the 4% currently being assigned to it. 

Here are the key Asian economic data due this week:

• Monday, Sept. 13: India CPI, Japan PPI and 3Q BSI large all industry
• Tuesday, Sept. 14: RBA Governor Lowe speaks, Australia business confidence and 2Q house price index, Japan industrial production
• Wednesday, Sept. 15: Australia consumer confidence, New Zealand BoP current account balance, Japan core machine orders, China retail sales, industrial production and fixed assets ex-rural, Indonesia trade balance, India trade balance
• Thursday, Sept. 16: New Zealand 2Q GDP, Australia employment change, Japan trade balance
• Friday, Sept. 17: New Zealand manufacturing PMI, Singapore non-oil domestic exports

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