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Although many policy makers see further rate cuts as counter-productive, markets expect RBNZ to keep cutting. But few see a cut on Thursday

Bonds
Although many policy makers see further rate cuts as counter-productive, markets expect RBNZ to keep cutting. But few see a cut on Thursday

By Jason Wong

A mild upward bias has been evident for US rates over the past week, as the market gradually prices in the chance of more Fed tightening this year. 

Around 20 bps of tightening is priced in by December, still not a full rate hike though.

The US 2-year Treasury rate is up a point to 0.83%, the highest level since late March, while the 10-year rate reached a similar milestone and is up a point to 1.90%.

It’s a big US data and event week, with the highlights being the FOMC meeting on Thursday morning and GDP data later that night. 

The tone of the FOMC statement is expected to reflect an open-minded Fed about the timing of the next tightening. It’s unlikely to want to close the door on a possible June tightening, so the market will be left with monitoring the data and market conditions.  A Q1 GDP figure barely above the zero mark, weaker consumer sentiment data and soft pricing data later in the week should contain Fed funds pricing by week’s end.

A drift higher in rates has been evident across other markets, including Europe and Japan with Germany’s 10-year rate up to 0.26%, its highest level since mid-March.

The NZ market has managed to buck that trend, for now.  On Friday, NZ’s government bond curve showed yields down in the order of 1-2bps, defying the upward pressure in rates from offshore.  In the swaps market, the 2-year rate was down 2.5bps to 2.215% while the 10-year rate was down 0.5% to 2.975%.

NZ’s high relative yields remain attractive in a global context and are likely one factor in the NZ rates market’s outperformance.  Also against the theme of other markets, further RBNZ easing is likely.

Across Europe and Japan, further rate cuts deeper into negative territory are now widely seen as counter-productive, whereas the RBNZ still has plenty of bullets left. 

Published on Friday, a Bloomberg survey of 16 economists showed eight expecting the OCR to trough below the 2% mark – seven at 1.75% and one at 1.5%.  This implies 50-75 bps of further easing.  Just three, including BNZ, expect the next 25 bps of easing to come as soon as this Thursday, at the RBNZ’s next OCR review.

Daily swap rates

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Jason Wong is on the BNZ Research team. All its research is available here.

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1 Comments

Across Europe and Japan, further rate cuts deeper into negative territory are now widely seen as counter-productive, whereas the RBNZ still has plenty of bullets left.

To achieve what, exactly?

With so very little holding up the idea of continued and even more robust advance, you might wonder why economists don’t challenge their own views. It is pure ideology as at the center of monetarism is the core, unshakable faith in monetarism – “stimulus” always works, and the more of it that is delivered the better the economic prospects. Rather than reconsider whether any of that is actually true, economists have been busy trying to explain why you don’t see it. At least they now understand that there is indeed a very wide gulf between their version and what the vast majority of everyone else perceives. Read more

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