RBNZ: RBNZ Prepared To Ease Further But May Slow The Pace
The RBNZ’s MPC cut rates by 50bp to 3.75% as was expected. This brings cumulative easing to 175bp and it appears that it is prepared to ease further in 2025 if the economy develops as it expects. It has an additional 50bp of 2025 easing in its updated OCR profile than in November. It is now forecast to end this year at around the mid-point of the 2.5-3.5% range that the RBNZ estimates as neutral, down from just above 3.5%. This has been brought forward by over a year.
- The updated OCR profile suggests there is likely to be a slowdown in the pace of easing to 25bp but the current economic outlook is implying 25bp cuts at both the April 9 and May 28 meetings. There could be another 25bp in H2. The path remains consistent with Governor Orr’s view in November that rates don’t need to go below neutral to be stimulatory.
- The outlook is consistent with inflation remaining within the 1-3% target band over the medium-term thus giving the MPC room to cut rates another 50bp today. It did note though that inflation is likely to be “volatile in the near term, due to the lower exchange rate and higher petrol prices”. It revised up its 2025 inflation forecasts with Q1 now at 2.4% up from 2.0% but Q4 only 0.1pp higher at 2.5%. The midpoint has been pushed out to mid-2027.
- Heightened uncertainty from geopolitics and trade policy was highlighted with it likely to “weigh” on investment and the “net effect” on NZ inflation “currently unclear” but having inflation close to the target mid-point puts the RBNZ in the “best position” to respond.
- Employment is now expected to pick up in H2 this year as growth recovers. However, the unemployment rate forecasts are little changed with the peak still at 5.2% in H1 2025. Quarterly GDP projections were little changed.
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ASIA STOCKS: Asian Equities Higher Ahead Of Trump Inauguration
Asian markets are trading higher today, supported by strong US economic data and a rally in US tech stocks last week. There has been increased optimism in China while the PBOC kept loan prime rate unchanged, as expected with the PBOC balancing domestic demand weakness with currency stability. Broader market sentiment remains supported by reduced global rate hike fears, though geopolitical and policy uncertainties, including Trump’s second-term agenda, keep markets cautious.
- Japan's Topix and Nikkei indices both rose 1.40%, driven by gains in export-related stocks like Toyota and banks, as the yen weakened. Investors are also optimistic about the upcoming Bank of Japan policy meeting, with expectations of a rate hike boosting sentiment.
- South Korea’s KOSPI opened higher however has given back back to now trade flat, gains in steelmakers like POSCO and battery producers have been offset following automakers and chip manufacturers trading lower.
- Taiwan's TAIEX is trading 0.40% higher, although TSMC & Hong Hai are underperforming global semiconductor peers after the Philadelphia SE Semiconductor Index rose by 2.85% on Friday
- The Chinese market is buoyed by improving US-China relations after a positive call between Trump and Xi Jinping, which lifted risk appetite. The CSI 300 is trading 0.60% higher, while in Hong Kong the HSI is 1.15% higher, tech is the top performing sector with the HS Tech Index 1.70% higher.
- Australia's ASX 200 is 0.30% higher, with Financial and Material stocks outperforming. New Zealand's NZX 50 is trading 0.45% lower.
AUSSIE BONDS: Subdued Session With Local Calendar Light & Cash US Tsys Out
ACGBs (YM -1.0 & XM -1.5) are slightly weaker after dealing in narrow ranges in today’s session.
- With the local calendar empty and cash US tsys out for Martin L. King Day, the local market has lacked direction.
- Cash ACGBs are flat to 1bp cheaper.
- Today's sale of the A$300mn of the 4.25% 21 June 2034 green bond drew a cover ratio of 5.18x.
- Swap rates are flat to 1bp higher.
- The bills strip is -1 to -2 across contracts.
- RBA-dated OIS pricing is flat to 2bps firmer across meetings today. A 25bp rate cut is fully priced for April (102%), with the probability of a February cut at 67% (based on an effective cash rate of 4.34%).
- “Yarra Capital Management’s Tim Toohey is tipping three rate cuts this year and a final one in 2026, taking the cash rate to 3.35 per cent. His rationale is that it takes about three reductions to get financial conditions just below the neutral setting – the level at which the cash rate is neither overly stimulating the economy nor suppressing growth.” (per AFR)
- The local calendar is light this week, with the highlights being the Westpac Leading Index on Wednesday and S&P Global PMIs (P) on Friday.
CHINA: Central Bank adds Liquidity via this Morning’s OMO.
- PBOC issued CNY123bn of 7-day reverse repo in this morning’s open market operations.
- Today’s maturities CNY24.8bn
- Total net issuance CNY98.2bn
The PBCO controls and maintains liquidity in the interbank market through the issuance of reverse repo.
- In recent days liquidity has been drained from the system in what many are viewing as an attempt to halt the bond market’s relentless rally, it is likely that ahead of Lunar New Year holidays, the PBOC will continue to inject liquidity into the system.
- China's Overnight Repo rate is up +0.30 this morning at 1.8076
- The Lunar New Year holidays sees China out Jan 28-31 inclusive.
