Geopolitics remains a key thematic - ANZ

Analysts at ANZ explained that, in respect of N.Korea, markets are right to be paring back on some of the panic after the White House took steps on Sunday to reassure us that nuclear war is not imminent. 

Key Quotes:

"But at the same time, having ratcheted up the rhetoric this far, it is hard to see either side backing down significantly and we doubt we’ve seen the last of this “issue”. To us, geopolitics remains a key thematic, and along with secular low inflation, will keep a lid on policy rates and bond yields."

"With regards to inflation, if the common factor is global and secular, that implies we are likely to see more rate convergence as markets focus on long run neutral rates."

"We think that benefits NZ term yields (ie. they fall) and the NZD given how elevated ours are. Consider, for example, the spread between NZ and US 5 year rates 5 years forward. That spread sits at ~125bps. Yet if one takes the RBNZ’s view that the neutral OCR is ~3.5% and one uses the Fed’s 3% long term dot plot as a proxy for the US neutral rate, just 50bps separates our respective neutral cash rates. So why is the bond spread so wide? Arguably, it shouldn’t be!"