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Market sentiment rises as Eurozone manufacturing expanding again. Yields rise worldwide and NZ expected to follow

Bonds
Market sentiment rises as Eurozone manufacturing expanding again. Yields rise worldwide and NZ expected to follow

By Kymberly Martin

NZ swap and bond yields closed down 4-6 bps yesterday. Overnight, US 10-year yields pushed up from 2.20% to 2.28%.

Yesterday was all about the release of NZ Q3 CPI. This came in below expectation, at 1.0%y/y, as we had highlighted was the risk.

This now lies well below the RBNZ’s 2% mid-band target for inflation over the medium term. At next week’s RBNZ meeting the Bank will likely feel compelled to highlight that there are now two-sided risks to the inflation outlook.

However, it will be wary of encouraging lower market expectations, which already price very little in the way of further rate hikes (only 50 bps over the next two years). The implications of that, in terms of re-stoking areas such as the housing market, may be unwanted.

Partly contingent on expectation of further NZD declines, we continue to see higher inflation ahead. We forecast annual inflation of 1.9% over calendar 2015 and 2.5% over the course of 2016.

Unsurprisingly, NZ yields declined across the board in response to the data release. 2 and 5-year swap closed at 3.91% and 4.17% respectively. The 2-10s curve has steepened a little further to 48 bps. We reiterate, we believe we are close to cyclical trough on this spread and do not expect a convincing break below 40 bps in this cycle.

Market sentiment was boosted overnight, as PMI data showed the German Manufacturing sector moving back into expansion, dragging the Eurozone Manufacturing PMI up to 50.7. This prompted German bond yields to take two rapid steps higher, followed by a steady uptrend overnight. From 0.84%, they now sit at 0.90%. Similarly US equivalents have traded up from 2.20% to 2.28%.

Expect this to result in higher yields, especially at the long-end of the NZ curve this morning. Today, the NZ trade balance will be released along with the RBNZ’s latest data on LVR ratios.

 
 
 
 
 
 
 
 

Daily swap rates

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Source: NZFMA
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Source: NZFMA
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1 Comments

It seems that in terms of demand-driven influence on prices, that we are now into a deflationary phase.   

Council rates, insurance premiums and Auckland property excluded of course. 

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