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Good US data on retail and consumer sentiment failed to move markets. This was followed by weaker Chinese data. Mood slippage may see higher expectations of more rate cuts

Bonds
Good US data on retail and consumer sentiment failed to move markets. This was followed by weaker Chinese data. Mood slippage may see higher expectations of more rate cuts

By Kymberly Martin

NZ swaps closed up 1-2 bps on Friday.

US 10-year yields closed for the week at 1.70%.

There was little response in rates markets on Friday to NZ Q1 retail sales data. These were solid at 0.8%q/q, although a little lower than consensus expectation.

However, NZ swaps pushed higher in response to headlines early in the day that one major NZ bank expects the RBNZ to remain unchanged in June. Our core view remains for a 25 bp cut at this meeting.

The market now prices around a 50% chance of an RBNZ cut at its June meeting and that the OCR will be cut to a trough of 1.87% in the year ahead. NZ 2-year and 10-year swap closed for the week at 2.22% and 2.86% respectively, taking the 2s-10s curve to 64 bps. This is the lower-end of its expected 60-110 bps trading range for the year ahead.

On Friday, the most recent data of non-resident proportional holdings of NZGBs was released. These showed a further slip in April to 66.5%. These are back at levels of a year ago, before they surged to 70% mid last year. Current levels remain above the long-term average level of the past 20 years, of 61.4%.

On Friday night, US 10-year yields initially gapped higher on the release of stronger-than-expected US retail sales data. They then held onto gains until after the release of a strong University of Michigan consumer sentiment survey. But yields drifted lower into the close, as US equities slumped. US 2-year yields closed at 0.75%, from intra-night highs above 0.78%. US 10-year yields closed for the week at 1.70%, down from early-Saturday morning highs above 1.75%.

China data releases over the weekend, that came in below expectation, should weigh on sentiment and yields at the start of this week.

Domestically, Tuesday’s RBNZ survey of inflation expectations data are probably of greater interest this week.  Any further slippage in the 1 and 2-year-ahead measures would likely see the market increase expectations of imminent rate cut(s). Still, we see the risks tilted toward expectations nudging higher from very subdued levels.

Daily swap rates

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Source: NZFMA
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Source: NZFMA
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Kymberly Martin is on the BNZ Research team. All its research is available here.

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