By Kymberly Martin
Swap yields closed up a fraction further on Friday, to end the week up 12bps across the curve. On Friday night, US 10-year yields slipped a little to 1.74%.
NZ 2-year swaps closed the week at 2.66%, about the middle of the 2.55% - 2.80% range we think is likely to hold for some months. The market now prices a 20% chance of a 25bps rate cut by year end and a 60% chance of a cut by mid next year.
The key downside risk to market pricing, in coming weeks, is the 8 November release of unemployment data. We pick a to 6.6% outcome for Q3. However, were the rate to tick up further to the psychologically important 7.0% level, the market would likely price an imminent cut.
Whether the RBNZ would actually respond with a cut would likely depend on the composition of the labour data. A rise in the unemployment rate as a result of a higher participation rate, may be a sign of improving confidence in the economic outlook. Thus, if may not elicit a stimulatory response.
The 2s-10s curve has remained around 111bps this week. Friday night’s slide in US 10-year bond yields (despite decent US data releases) should add flattening pressure to the NZ curve at the start of the week.
Friday’s DMO auction was fairly well received with an average 3.7x bid-to-cover ratio. The yields on NZ 10-year bond yields declined 3bps after the result to finish the week at 3.56%.
After the excitement of last week’s OCR and inaugural speech by RBNZ governor Wheeler, it is a more mundane week ahead domestically. There will be plenty to watch on the global front however.
There are regional manufacturing PMI released from mid-week, ahead of the closely watch US non-farm payrolls on Friday. These data should help provide direction for US long yields. It would take convincing strength in data for US 10-year yields to break above the key 1.85-1.89% level.
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