Austerity Bites – ANZ

Fiscal policy receives insufficient attention and will be a major drag on growth over the coming few years. Local government spending is also set to be sharply curtailed. These dynamics are compensated by the rebuild until 2014, but the net impact is monetary policy lower for longer. The DecemberMonetary Policy Statement is expected to be accompanied by a no change decision, and illustrate that a high hurdle remains to OCR moves in either direction. However, we expect an RBA cut across the ditch tomorrow, and we will be watching for any NZD/AUD impact. Here at home this week’s data inputs into Q3 GDP are expected to confirm a weak quarter, but with mixed rates of sector activity.

DECEMBER MPS PREVIEW

Another “no change” decision and a neutral policy assessment are likely to characterise Thursday’s MPS.  The key recent themes, namely an uncertain global scene, a pending city rebuild, and contractionary fiscal policy, remain dominant. The projections are expected to still show a slight tightening bias, and flag a low interest rate endpoint.

INTEREST RATE STRATEGY

The RBA and RBNZ meetings will be the key focus for local markets this week.  We expect NZ rates to remain largely range-bound despite ANZ’s expectation for an RBA rate cut on Tuesday. Offshore interest in NZGS is expected to return, with NZ bond yields cheapening up against both swap rates and US and Australian bond yields. 10 yr swap spreads are biased to widen from current levels of around 20bps and we continue to prefer flattening trades given their obvious carry benefits. US Treasury yields are expected to remain anchored in fairly tight ranges.

CURRENCY STRATEGY

We expect the NZD to remain elevated, supported by an on-hold RBNZ announcement, best-in-class bond yields, and seasonal demand. But it’s not a one-way street: anxiety over the US “fiscal cliff” could give the USD a boost, limiting attempts for NZD to move higher. Event risk is high this week, with a host of central bank meetings and a number of top-tier US data releases including ISM and Non-farm Payrolls.

THE ANZ HEATMAP