By Kymberly Martin

NZ swaps closed down 1-4bps yesterday with a steepening bias to the curve. Overnight, US long yields consolidated.

Yesterday’s retail sales data continued the recent theme of NZ data disappointments. The biggest response in swaps was seen at the short-end. 2-year yields fell 4bps to close at 2.57%.

The market now fully prices a 25bps RBNZ rate cut by next June. Certainly the accumulation of soft data has moved the debate to ‘what will prevent the RBNZ cutting?’ as opposed to, ‘what would make it cut?’

The onus is now on domestic data to improve. Although Q3 GDP growth now looks weak, forward-looking indicators like business and consumer confidence still indicate reasonable growth ahead.

In addition, the housing market (particularly in Auckland) continues to bubble along. There is also doubt around what a rate cut would achieve. In itself it is unlikely to either spur investment or bring down the stubbornly high NZD.

Still, for now we suspect the market may be inclined to move toward pricing increased probability of rate cuts.

This is especially true as there are few key data ahead of the Dec 6 RBNZ meeting to disavow it of this view. Today’s October PMI will be important in this regard.

Today, the DMO also issues $100m of NZGB15s and $250m of NZGB23s. We expect solid if not stellar demand should be seen, as in recent auctions. This is despite yields on 10-year bond yields (3.42%) being close to the bottom of their range of the past 4 months.

Overnight, US 10-year bond yields failed to break above 1.63% before returning to sit just below 1.60%. Still bonds appear to be finding stiff resistance at this level.

If yields do not break lower (our central case) then it will also likely limit further flattening of the NZ curve.

The risks to the NZ curve at present appear to be to the upside, if greater chances of RBNZ cuts are priced in.