RBNZ To Hike In August

That's the verdict after an extremely hawkish meeting overnight.

Expectations were already high that they would talk about tapering and potentially hike rates as soon as November.

Instead, the RBNZ announced an end to QE (taking effect July 23rd) and OIS markets are now pricing a 70% chance of a hike at the August meeting, and a 42% chance of two hikes by the November meeting.

NZD is up 1% vs the dollar and 0.75% vs the AUD.

ANZ Summarised Review:

Ending LSAP clears the way for an August hike

  • The Reserve Bank today announced that its purchases of assets under the LSAP programme would end by 23 July, in a release titled “Monetary Stimulus Reduced”.

  • The OCR was left at 0.25% but importantly, the comment that reaching its targets would require “considerable time and patience” was dropped.

  • We are now forecasting the OCR to be lifted by 25bp in August, with CPI and labour market data to provide the final evidence the RBNZ requires.

(Q2 CPI data is due on Friday)

The RBNZ has absolutely done enough hand-waving today to tick the ‘market-prep’ box for an August hike, with CPI and labour market data set to do the rest.

The final sentence of the release was a hat-tip to the fact that the balance of risks around the least regrets has flipped – it’s all about the risk of shooting out the top: “the Committee agreed that the level of monetary stimulus could now be reduced to minimise the risk of not meeting its mandate.”

The Bank of Canada step up to the hawkish central bank platform today, with expectations of a taper announcement from $3bn to $2bn per week, but an uncertain path ahead.

Via Scotiabank:

BANK OF CANADA—GRADUAL AND MEASURED VERSUS SUDDENLY HURRIED

A full set of communications is due out on Wednesday including the policy statement and Monetary Policy Report including updated forecasts followed by Governor Macklem’s press conference an hour later.

A further step away from the QE program is expected but with little to no change in hike guidance.

A further reduction of Government of Canada bond purchases from $3 billion per week down to $2 billion is expected.

The key is striking a balance on the magnitude of the adjustment that retains future flexibility but without signalling a greater rush that could bring forward overall exit pricing.

It’s feasible that a greater reduction is offered, but we err on the somewhat more cautious side since a greater reduction might compromise the desire to exit in ‘gradual and measured’ fashion as the BoC puts it.

Reducing purchases down to, say, $1 billion in one swoop at this meeting would likely set up expectations for an end to the purchase program, perhaps at the September meeting, with pulled-forward expectations for a reinvestment phase and rate hikes.

That’s not inconceivable—and would be what I’d personally like to see in ending the purchase program sooner than later—but would signal a greater rush to exit than Governor Macklem’s guidance has tended to indicate to date.

The main argument in favour of tapering again now is to look beyond the bumps and wiggles in the near-term developments while keeping an eye on where the BoC wants to be roughly a year from now and how to get there in their so-called ‘gradual and measured’ fashion.

The April forecasts indicated they expected spare capacity to shut over 2022H2 and Governor Macklem has previously indicated this would be about the time to expect the beginning of rate hikes. Deputy Governor Gravelle’s speech (here) had indicated the BoC would gradually reduce net bond purchases to zero and follow this with a reinvestment period of uncertain form and length before hiking.

Gradual & Measured vs Suddenly Hurried is an excellent framework for today's meeting.

Elsewhere it's all pretty flat amid 'Asian shares lower on U.S. inflation jitters' headlines.

Feel like I've banged on about inflation enough over the past few months.

TL;DR

  • I still think it's transitory and 2022 will be very different

  • The sacrificial lamb will be the QE taper. Rate hikes will not immediately follow

Even Mr Hawk's Hawk Kaplan understands this 👇

 FED'S KAPLAN: TAPERING SOONER GIVES THE FED MORE ELASTICITY AND DOES NOT TIE THE FED TO EARLIER RATE INCREASES.— Breaking Market News (@FinancialJuice) July 13, 2021 

The calls for a taper are getting louder from the hawks though, and even Daly (usually one of the more dovish members) said yesterday that taper talk should be on the table and the Fed will probably be in a good position to taper at the end of this year or next.

This thread is an excellent read/breakdown of the market reactions to the print 👇

 So we know that after the CPI print:

1. mkt bought TIPS

2. sold nominals across the board

3. with concentration on the 3-5 sector

4. resulting in flatter curve on long end

5. and more humped curve

6. indicating mkt sees potential risk that fed OR inflation cuts off LT growth

8/8— 𝐄𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐭 𝐌𝐚𝐫𝐤𝐞𝐭 𝐇𝐲𝐩𝐞 (@EffMktHype) July 14, 2021 

And the conclusion that Fed or inflation cuts off LT growth is one premise I basically agree with.

Fed's response to rising inflation (and potential of that response to cap growth) is the focus for now.

Powell is up today in front of the Senate (and will surely continue to preach patience), then 'inflation politics' may start to come into play... 👇👇👇

Negotiations are still ongoing and no major breakthrough has been reached with at least two of the key moderate Democrat senators (Manchin & Tester) saying that they’ll need time to sort through the plan compiled by the Budget Committee.

“We need to pay for it,” Manchin said. “I’d like to pay for all of it. I don’t think we need more debt.”

Today's calendar via Trading Economics: