Markets now expect only two more OCR hikes by year-end; a shift in global sentiment needed to change expectations

By Kymberley Martin

NZ yields followed global moves, closing down 4-7bps yesterday.

Overnight, US 10-year yields dipped to 2.40% before returning to trade at 2.44%.

The NZ 2-10s curve has flattened back to 79bps as 10-year swap declined 6bps yesterday, following the previous night’s decline in US yields. 2-year held up marginally better, declining 4bps to 3.88%.

However, at face value the market now prices just 50bps of OCR hikes by year-end and a cumulative 115bps over the next two years.

The downward revision in OCR expectations is very much part of a trend globally in recent weeks.

Expectations for future Central Bank activity have been revised down across key markets including the US, Eurozone and Australia.

To get a turn in the NZ trend will likely therefore take a shift in global sentiment as opposed to merely another strong domestic data point.

NZ bond yields also declined 6-7bps yesterday. The yield on NZGB23s now sits at 4.20%.

However, spreads to US and AU equivalents have remained range-bound in recent days suggesting moves are global in nature. The NZ-AU and NZ-US23s spread sit at 67bps and 196bps respectively.

Following the release of a weak 2nd reading of US Q1 GDP (-1.0%q/q) overnight, US 10-year yields initially dipped as low as 2.40%. However, they have subsequently rebounded to 2.44%.

Today, NZ household credit data will be released. Tonight, there is a smattering of US data to end the week, including the University of Michigan Confidence survey and Chicago PMI.