VIEW: JPM: Fiscal Update Trims Deficits & Issuance, Implications For QE

J.P.Morgan note that "The implications of recent fiscal news are somewhat nuanced given the significant conservatism of original government/RBNZ forecasts vs current tracking, and the very front-loaded nature of policy support to date. The lost output from lockdown has been much less than feared. This is good news, but still leaves a large output gap, and also means much of the firepower of the QE program has been delivered at a time when the impulse was to much lower yields anyway. Now, as the economy faces more difficult headwinds from ongoing border closures and seasonal absence of tourism and steeper global curves into 2021, the program is bumping up against capacity constraints. There is a clear intent to manage this by operating in concert with the DMO's supply plans. But projecting forward the recent run-rate of fiscal outcomes and issuance, we expect the ownership share constraint will be binding around 2Q21, a year before the NZ$100bn LSAP program is supposed to finish. This means either the DMO has to keep issuing in surplus to requirements (despite already being more than NZ$20bn over-funded), or the RBNZ has to taper its purchase pace and flow support. Given the likely unwanted currency appreciation that would come with early abandonment of the program and ongoing increases in yields, we expect LSAP constraints ultimately bring the central bank back to the table to review other options to ease next year, including rate cuts."