Risk appetite stabilises; yield surge fizzles; US inflation no concern to Fed

By Kymberly Martin

There was little to report in NZ markets yesterday as yields closed up 1-2bps across the swap and bond curves.

The market simply took continued strength in the ANZ business survey in its stride, as this is now a familiar story.

The market continues to price a first OCR hike by around March next year. This is consistent with our own view.

It prices around 170bps of hikes in the coming two years relative to our own view of 200bps over this period.

Overnight, risk appetite appeared to stabilise as military action in Syria was delayed. As equities provided modest positive returns, US 10-year yields consolidated around 2.76%.

Yields briefly surged toward 2.83% on the release of the second reading of US Q2 GDP (2.5%ann. vs. 2.2% expected), but this proved short-lived.

Today’s only domestic data release is building permits which are unlikely to garner a market response.

Tonight, there are a number of US data points with potential to impact on US yields. The July US core PCE will be released (the Fed’s preferred inflation measure).

However, this will likely simply confirm that for now, inflation is not an impediment to the Fed maintaining accommodative policy for as long as it feels is necessary, based on other factors such as the labour market.