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Chances for a US rate hike fade. Chances for a NZ rate cut also fade. Global bond markets stabilise as Brexit risks isolated to Europe

Bonds
Chances for a US rate hike fade. Chances for a NZ rate cut also fade. Global bond markets stabilise as Brexit risks isolated to Europe

By Jason Wong

Despite being in the midst of a significant recovery in risk assets, the global bond market is not selling off, a reflection of the expectation of lower-for-longer policy rates, as the world digests the shock from the UK.

US 10-year Treasury yields have traded in a very tight range of 1.45-1.48% over the past 24 hours, while UK and Germany 10-year rates are both down by 1 bp.

The US OIS market no longer prices in any chance of the Fed easing over coming months. That sounds sensible and there was never really much chance of an easing anyway.

More interesting, there is little chance of the Fed tightening over the next 12 months, according to OIS pricing.  One has to peer into 2018 before seeing a full rate hike priced in.

Data overnight confirmed that US consumer spending was on track to record a decent recovery in Q2, with personal spending up 0.4% in May following the 1.1% jump in April.  Meanwhile, the core PCE deflator continued to show only moderate inflation pressure.

Yesterday, there was upward pressure on local rates, a reflection of global forces. The swap curve was up 3 bps across the whole curve, with the 2-year rate closing at 2.225% and the 10-year rate at 2.65%.  Trading activity remained light.

Little OIS market trading took place, but the August meeting now shows exactly a 50/50 chance of a 25 bps cut priced in.  The calls for further easing weren’t helped by the significant downward revisions to NZ’s unemployment rate, with the whole track shifting down by a fairly constant 0.5 percentage points over the past six years or so and the Q1 reading revised down to 5.2%.  While nothing has fundamentally changed and the revision simply reflects a different methodology of measuring the unemployment rate, it does water down the view that there is plenty of spare capacity which will keep wage inflation low.

Daily swap rates

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

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