Last week longer NZ interest rates stormed upwards, without a clear catalyst. The 2-year swap rate rose from 8.52% to as high as 8.68%. The market is now pricing in almost a 60% chance of further hikes next year (at one stage market pricing put the odds at around 80%!).

We have been startled by the speed at which the market has come around to our point of view on further rate hikes. A definite factor is the broad strength of economic data we have seen in the past month or so, suggesting the economy has successfully sidestepped the small hole we expected it to fall into in the latter months of this year before rebounding. And the upbeat news continued last week, with the release of NBNZ??™s monthly business confidence survey.

Business confidence improved from -26.5% in September to -13% in October. The report was strong across the board, with pick-ups in all the major components except export intentions. A strong rebound in confidence in the construction sector, to their first positive readings since April, led the increase. Their optimism may be unfounded: the construction sector is also the most hopeful that interest rates are due to be cut. In any case, the result is unlikely to thrill the Reserve Bank, who are relying on a fall in construction costs as activity eases.

Investment intentions rose again, and were particularly strong amongst service providers and manufacturers. This is in line with our expectation of strong business investment going forward. Employment intentions also rose, and were highest amongst services and agriculture. The direct inflation indicators provided no relief for the RBNZ, with inflation expectations ticking up a little, and pricing intentions rising again.