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Markets price in rate cuts from RBA and RBNZ, hikes from US Fed; anaysts not so sure. Yellen's a 'balanced view'. Eyes on NZ PMI

Bonds
Markets price in rate cuts from RBA and RBNZ, hikes from US Fed; anaysts not so sure. Yellen's a 'balanced view'. Eyes on NZ PMI

By Kymberly Martin

NZ swap and bond yields closed 0-3 bps higher yesterday.

US 10-year yields have traded off early evening lows near 1.70%, to now trade at 1.74%.

The market continues to price further easing from the RBA and RBNZ. This is unsurprising given global uncertainty, and that market participants see these two Central Banks as two, of few, who have further capacity to cut rates. Around 30 bps of RBNZ cuts are currently priced. This can also be read as the market applying a 60% chance to 50 bps of cuts by year-end.

We maintain that low-side headline inflation readings (that will persist for some time) will be insufficient to prompt the Bank to cut. Rather we keep an eye on downside risks to global growth, weakness in the domestic dairy sector and the stubbornly resilient NZ TWI, as potential catalysts for a cut this year.

US yields touched their intra-night lows early in the evening, pushing higher ahead of Fed Chair Yellen’s testimony before the House, in the backdrop of positive equity markets. Yellen presented a balanced view. She acknowledged, but did not over-egg market volatility; "Foreign economic developments, in particular, pose risks to U.S. economic growth...  we will take into account a wide range of information, including... readings on financial and international developments.”

She reiterated that she now saw the unemployment rate at the NAIRU, but declined to elaborate on recent wage pressures. She dismissed declines in market-based indicators of inflation expectations, blaming liquidity and risk premiums. Overall she did not give any direct hint of when the next rate hike might be expected. It seems “monetary policy is by no means on a preset course”.

Fed fund futures have slightly nudged up their pricing for future hikes. Around 33 bps of hikes are now priced over the next two years, up from 25 bps earlier. Some volatility in Treasury yields unfolded after Yellen’s comments, although overall yields are higher on the night. US 2 and 10-year yields trade at 0.72% and 1.74% respectively.

Coming up

The BNZ Manufacturing PMI is due today. Recall this index stood at a seasonally-adjusted 56.7 in December, well above its long-term norm of 53.0, indicative of strong momentum in the economy entering 2016.

Yellen will make further comments to the Senate tonight, though we would expect the same measured tone to prevail.

Daily swap rates

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Source: NZFMA
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Source: NZFMA
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1 Comments

She dismissed declines in market-based indicators of inflation expectations, blaming liquidity and risk premiums.

Yes indeed.

I once read a story of an army sharpshooter who visited a small town. He was amazed to find targets drawn on trees, walls, fences and barns. Even more fascinating was the fact that each target had a bullet hole in the exact center of its bull’s eye.

Inquiring about this, he had the honor of meeting the remarkable marksman. “I’ve never seen anything like this in my entire career,” said the Army man. “It’s incredible!

How did you do it?”

“Easy as pie,” replied the local rifleman. “I shoot first and draw the circles afterwards.” Read more

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