By Raiko Shareef
The NZ interest rate curve was re-priced lower yesterday, in the wake of the poor dairy auction and softer-than-expected inflation readings.
As noted yesterday, the Global Dairy Trade auction saw the overall price index fall 8.9%, taking the overall decline since early February to around 35%. Later in the morning, the NZ inflation report for Q2 was soft throughout.
The headline rise of 0.3% q/q undershot market expectations, with the muted rise in non-tradable inflation particularly eye-raising. That component, not affected by the stronger NZD, rose just 0.4% for the quarter. We and the RBNZ were looking for an outturn closer to 0.7%.
Accordingly, RBNZ rate hike expectations were pared somewhat.
The 2-year swap yield closed 9 bps lower for the day at 4.13%, its lowest level since the June MPS.
Market pricing for the July OCR Review was marked lower from a 92% chance of a 25 bp hike, to 80%.
We still consider a July rate hike effectively a done deal, since we can’t imagine the RBNZ would be pleased with market interest rates falling further (which would be case should they choose to pause). The market is much more comfortable with the idea of an extended pause thereafter, which gels with our view.
Formally, we expect pauses in both the September and October meetings, followed by a 25bp rate hike in December. But the risks are now heavily skewed towards the latter becoming a pause, too. Unless the NZ TWI falls in line with the RBNZ’s expectations in quick order, the growing disconnect between that and NZ commodity prices will weigh on the Bank’s interest rate projections.
Offshore, US Treasury yields were little changed overnight. The 10-year bond rate edged 1bp lower to 2.54%. Fed Chair Yellen’s second appearance this week failed to add new information to the debate.
In the day ahead, it’s back to watching monthly US data releases, with jobless claims, housing starts, and the Philly Fed Index due. Low-tier NZ releases will not trouble the scorers
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