Low US wage pressure has bond market reassessing likely Fed response; NZ swap rates likely to flatten this week

By Kymberly Martin

NZ swaps closed up 3-5 bps on Friday.

On Friday night, US 10-year yields declined from 2.39% to 2.30%.

In a relatively quiet day domestically, NZ swaps pushed higher, with the curve a little steeper, following the previous night’s moves offshore. NZ 2 and 5-year swap closed at 3.93% and 4.21% respectively.

The 2-10s curve closed a little steeper at 55 bps, up from lows around 40 bps in mid-October. However, given the plunge in US 10-year yields on Friday night, we expect the curve will flatten today.

The decline in US Treasury yields, across the curve, came in direct response to the release of the October US non-farm payrolls report. The headline gain (214k) was slightly below consensus expectation.

However, the sharp move down in yields was likely assisted by signs that US wage pressures still remain muted. Average hourly earnings rose 0.1%m/m, to be up 2.0%y/y (2.1% expected). The market is betting this will limit any urgency for the Fed to raise rates.

This is despite the fact the US unemployment rate (5.8%) is now inching closer to the level the Fed estimates as long-run equilibrium (5.2%-5.5%).

US 2-year yields dipped from 0.55% to 0.50%. 10-year equivalents closed the week below 2.30%.

Today, it is a pretty quiet start to the week on the local calendar. The REINZ housing report is due any day, but this week’s highlights will come later in the week. Wednesday brings the RBNZ’s Financial Stability Report and Thursday the latest BNZ PMI.