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Track in swap rates unlikely to rise far. Eyes on NZ CPI data due this morning

Bonds
Track in swap rates unlikely to rise far. Eyes on NZ CPI data due this morning

By Kymberly Martin

With little on the local data agenda on Friday it was a subdued end to the week.

NZ swaps closed down 1 bps across the curve. US 10-year yields traded quite a wide range but ended the week just below 1.87%.

NZ 2-year swap ended the week at 3.52%, almost 6bps above the level it traded prior to last Thursday’s better-than-expected AU employment report.

Still, we do not think the rise in short-end swaps will get far near-term as the market will likely remain inclined to price RBNZ rate cuts.

This is particularly true in light of the resurgence in the NZ TWI and our expectation of a very low 1Q NZ CPI reading today.

We expect annual inflation at just 0.1%, a fraction below consensus expectations, although a little above the RBNZ’s published expectation in its March MPS (0.0%).

We believe RBNZ’s Assistant Governor, Dermott’s scheduled Thursday speech on inflation is timed to argue why the RBNZ is not inclined to cut rates despite current low inflation. Medium-term indicators are still pointing up. Still, that will not stop the market from being encouraged in pricing cuts, in the interim.

On Friday night, US 10-year yields had drifted to below 1.85% ahead of the release of US CPI data. While headline CPI was extremely subdued, core inflation was a little firmer than expected, at 1.8%y/y. This appears to have helped prompt a rise in US 10-year yields to 1.91%.

Despite a solid University of Michigan consumer confidence reading the move did not sustain. This is perhaps unsurprising as the spotlight remains on Greece, where headlines suggested the IMF was prepared to give little in ongoing negotiations.

German 10-year bond yields touched new intra-night lows of 0.05%.

Daily swap rates

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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Source: NZFMA

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