Rates rise as commodity prices up. RBA signals cuts less likely. NZ inflation expectations won't change RBNZ views

By Kymberly Martin

NZ swaps closed higher and the curve steeper yesterday.

Overnight, US 10-year yields traded a fairly tight range between 1.73% and 1.77%.

There was a ‘bear’ steepening of the NZ swap curve yesterday, following the previous night’s offshore moves as commodities pushed higher. This move extended following the release of the RBA’s Minutes.

Most interestingly, the Minutes stated; “Members discussed the merits of adjusting policy at this meeting or awaiting further information before acting”. They then proceed to say; “members were persuaded that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing policy at this meeting".

Our NAB colleagues believe this tends to argue against a very early follow up rate cut (a move in June or July). They also note that the Minutes still describe policy as “very accommodative”.

NAB sees the RBA on hold for the remainder of 2016. However, they acknowledge a further rate cut remains a possibility if inflation continues to surprise to the low side or if activity forecasts are revised lower. They do not expect such a move to be considered before the next CPI release (27 July).

On the day, AU 3-year swap closed up 3 bps, at 1.84%. The market now prices a 1.40% trough in the RBA’s cash rate within the year ahead, from 1.75% currently. NZ 2-year swap closed up 2 bps at 2.22%. NZ 10-year swap closed up 4 bps, at 2.88%.

Yesterday’s release of the RBNZ’s inflation expectations survey showed the 2-year-ahead measure virtually unchanged at 1.64%. The 1-year measure picked up to 1.22%, from 1.09% previously. These will not significantly impact the RBNZ’s views.

In its April OCR Review the RBNZ expected some lift in inflation, saying “we expect inflation to strengthen as the effects of low oil prices drop out and as capacity pressure gradually build”. However, the Bank still saw that “further policy easing may be required to ensure that future average inflation settles near the middle of the target range”.

The market continues to price around a 50% chance of a cut at the RBNZ’s June meeting and a trough in the OCR at around 1.88% within the year ahead.

Overnight, US yields traded a fairly steady sideways path, with US 10-year yields back at 1.75% currently. Early this morning Fed’s Lockhart (non-voter) said two or three Fed rate hikes this year are possible. The market remains unconvinced, pricing only a 65% chance of one hike by year-end. He believes it’s desirable that the Fed does not surprise the market. He also said that while negative rates are possible they are not on the cards.

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