By Kymberly Martin
The NZ curve flattened yesterday.
Overnight, US 10-year yields pushed up from 1.73% to 1.77% currently.
NZ yields pushed lower from the open yesterday as the lack of resolution in Doha negotiations resulted in a sharp fall in the global oil price.
The long-end of the curve felt the brunt of the move. NZ 10-year swap closed down 6 bps, at its historic low of 2.92%. Equally, NZGB2027s closed down 5 bps, at 2.81%.
The short-end of the curve also declined from the open, but showed only minimal response to the release of NZ Q1 CPI. The data confirmed that annual inflation remains very low, at 0.4%, but no lower than the RBNZ had anticipated in its March MPS. Later in the day the Bank published its ‘core’ inflation measure. Its ‘sector factor model’ estimate of inflation came in at 1.6% in Q1. This was the same as it was in Q4 2015.
None of yesterday’s releases should really cause anyone to change their view on the OCR. We continue to see the probability weighted toward the RBNZ cutting at its 28 April meeting, followed by a further cut in June. This would take the OCR to a cyclical trough of 1.75%.
Overnight the WTI oil price has grappled its way back off yesterday morning’s lows, helping support US yields. However the proximate cause of higher US yields in the early hours of this morning appears to have been comments by Fed’s Dudley. He is often considered part of a ‘tight-three’ with Chair Yellen and Vice-Chair Fischer. He stole directly from Yellen’s script when he said that monetary policy adjustments are likely to be “gradual and cautious”, as many uncertainties remain.
However, he sounded a little more hawkish when speaking about inflation. He was confident of returning to the Fed’s 2% target “as the labour market tightens further and the transitory factors that have held inflation down dissipate”. US 2-year yields have moved up from 0.72% to 0.74%, while US 10-year yields are 4 bps higher, at 1.77%. However, the market still only prices around a 50% chance of one 25 bps Fed rate hike by year-end. We expect more.
Daily swap rates
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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