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High expectation of an RBA rate cut today. UST 10yr yields creep ever higher. Attention turning to NZ labour market data, especially cost pressures

Bonds
High expectation of an RBA rate cut today. UST 10yr yields creep ever higher. Attention turning to NZ labour market data, especially cost pressures

By Kymberly Martin

NZ swaps closed up approximately 1 bps across the curve yesterday.

After choppy trading overnight, US 10-year yields now sit at 2.13%.

There was little on the domestic agenda to drive rates yesterday. Moves were modest, with direction likely influenced by Friday night’s offshore moves higher in yield.

NZ 2 and 5-year swap closed at 3.50% and 3.64% respectively, well within recent ranges that have held since the end of January.

Across the Tasman, there is increased speculation the RBA will cut rates today, as the market discusses the possibility that information has been ‘leaked’ to the press.

The market prices more than a 70% chance of a cut today and a total of 47 bps of cuts for the year ahead.

An ‘on hold’ response from the RBA would therefore produce the biggest reaction (rise in AU and NZ yields).

If the Bank does cut, the market’s response will be greatly influenced by whether the Bank indicates that further cuts are likely.

Otherwise the domestic rates market will be looking ahead to this week’s key NZ data release, tomorrow’s 1Q employment report.

Here, wage inflation indicators will be more important than headlines such as the unemployment rate.

This is because the RBNZ has made it clear that if it sees low inflation expectations becoming entrenched in wage setting behaviour it could feel compelled to cut rates.

We will therefore be looking for average hourly earnings data and the associated Labour Cost Index (LCI) to inform rate expectations. We expect the LCI to pick up to 1.9% in 1Q  from 1.8% in the previous quarter.

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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Source: NZFMA
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Source: NZFMA

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