By Kymberly Martin
NZ swap and bond yields pushed higher by 1-3bps across the curve yesterday.
Overnight, US 10-year yields traded a fairly tight path between 2.45% and 2.49%.
It was a fairly quiet day in NZ markets. The move higher in yields was mostly inspired by the improvement in risk appetite offshoreon Friday night.
NZ 2 and 5-year swap closed at 4.13% and 4.54% respectively. The 2-10s curve sits at 67 bps.
The market remains fixated on Thursday’s RBNZ meeting. The market currently prices an 85% chance of a 25 bps hike at this meeting.
It prices a total of 38 bps of hikes by year-end and that the OCR will be around 110 bps higher by two years’ time.
We still think the market under-estimates the medium-term trajectory for the OCR and continue to see a 5% level by two years’ time.
But overall, would not be surprised for 2-year swap to extend its pull-back toward 4%, in coming weeks. This is despite the fact we see ‘fair value’ around 4.4% based on our medium-term OCR trajectory.
The market may consider its 50% pricing of a further 25 bps hike by December (after a July hike) is too aggressive, given recent developments (declines in diary prices, undershoot on 2Q CPI, strong NZD). The recent pull-back in swaps would extend. Ultimately we would see any extended pull-back as a hedging opportunity.
Overnight, in the backdrop of a continued war of words surrounding the MH17 tragedy, equity markets were soggy.
US 10-year Treasury yields consolidated further around recent lows, trading at 2.47% this morning.
Today, it is all quiet on the domestic agenda. Across the Tasman the focus will be a scheduled speech by RBA Governor Stevens at 3pm (NZT).
Tonight, it will be all eyes on US CPI data. Consensus expects core CPI to remain steady at 2%.
But even this level would test US Fed Chair, Yellen’s assertion that the recent tick-up in US inflation indicators is just “noise”. Any upside surprise would likely see the market inching forward expectations for the first Fed hike. Currently this is priced for early Q3 next year.
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