There’s been a significant financial market reaction to yesterday’s government announcement of a package of measures designed to restore balance to the NZ housing market.
Wholesale interest rates fell a decent 6-8bps as investors deduced that an end to the house price upturn – and attendant economic headwinds – would allow the RBNZ to maintain its ultra-accommodative policy stance for longer. The OIS-implied timing of the first OCR rate hike was pushed back into the second half of 2022.
Our recent call that the momentum under house price inflation had likely peaked. However, yesterday’s announcements – particularly the removal of deductibility on mortgage interest – will further discourage investor participation in the market. This means it’s now likely that house price inflation will slow at a faster rate from here than our prior forecasts allowed for, and the risk house prices experience outright falls later in the year has increased. Meanwhile, there will be additional pressure on rents to rise.
The fall in the NZD/USD yesterday has extended overnight, albeit on the back of broader USD strength. It is now down just over 1½ cents in 24 hours – the largest fall since this time last year. The NZD crosses are also weaker, but by less than NZD/USD reflecting the impact of the stronger USD. NZD/AUD is down at a six-month low around 0.9150. Yesterday’s changes represent a significant change to the outlook, but NZ’s positive favourable balance of payments and terms of trade backdrops are structural positives for the NZD, thus we think NZD will find support on dips towards 0.6900.
Overnight, sentiment wobbled a little as investors cast a wary eye over reviewed lockdown measures in parts of Europe and the implications for global growth in Q1. Global equity indices are off 0.1-0.5% but the reaction has tended to be largest in commodity markets. Brent crude prices have fallen 6% to US$61/barrel. This has amplified downward pressure on commodity currencies, although CAD escaped most of the fallout thanks to news the Bank of Canada is winding down some of its stimulus programmes.
There was some attention on House testimonies from US policy heavy-hitters Powell (Fed Chair) and Yellen (Treasury Secretary) overnight. But both seemed to stick to a familiar song sheet, limiting market reaction. Yellen said the US could return to full employment as early as next year. Powell repeated the Fed’s line that inflation is expected to move up, but the lift will be “neither particularly large nor persistent” a less-than-subtle push-back against the ‘reflation trade’. US long bond yields slipped 2-4bps lower.