New Zealand bonds close mixed as investors eye next week’s Q3 GDP data, Fed policy decision

The New Zealand government bonds closed mixed Friday as investors await next week’s third-quarter gross domestic product (GDP) data. Also, markets remained focus on the Federal Reserve last monetary policy decision for 2016, which is scheduled to be released on December 14.

The yield on the benchmark 10-year bond, which moves inversely to its price, closed 1 basis point lower at 3.29 percent, the yield on 7-year note ended down nearly 1 basis point to 2.86 percent and the yield on short-term 2-year note jumped 5 basis points to 2.20 percent.

The Federal Reserve is expected increase the target range of the key interest rate by 25 basis points to 0.50 percent to 0.75 percent, with a unanimous decision. Little change to the statement, though the Committee is likely to acknowledge that market-based measures of inflation compensation have risen further.

We expect the Fed to raise policy rates by 0.25 percent at its policy meeting on 14th December. Such an outcome is unlikely to have much impact as it is already fully discounted in markets. Of more interest now will be what guidance the Fed provides on its intentions for next year. The Fed’s current guidance is relatively cautious with the ‘dot plot’ pointing to two rate hikes in 2017, said Lloyds Bank in its research note.

With the economy seemingly close to ‘full employment’ there is a now a case for more hawkish guidance. The sell-off in US Treasuries reflects concerns looser fiscal policy may cause the Fed to move more aggressively. For now the Fed will probably not change its rhetoric, while it waits to see what fiscal policy measures are enacted, they added.

The Reserve Bank of New Zealand Governor Graeme Wheeler in its recent speech said that the interest rates are probably low enough to return inflation to his 2 percent goal amid a robust economic expansion. He said the exchange rate is higher than the economic fundamentals would suggest is appropriate, but the global forces that have boosted the kiwi dollar may be abating.

Wheeler also reiterated that the bank remains concerned about the booming housing market, which has been fuelled by record-low borrowing costs. House-price inflation is much higher than desirable and poses concerns for financial stability.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 22.71 points to 6,893.30. While at 05:00 GMT, the FxWirePro's Hourly New Zealand Dollar Strength Index stood neutral at +3.30 (higher than +75 represent a bullish trend).