By Kymberly Martin
NZ swap and bond yields closed down 2-4 bps.
Overnight, US 10-year yields traded down from 1.59% to 1.55%.
Heading into Thursday’s meeting of the RBNZ the market has increased its pricing of potential OCR cuts. It now prices a trough in the OCR at 1.57% within the year ahead. It also prices 27 bps of rate cuts this week. i.e. a 25bps cut is fully priced and the market is assigning a small chance to a 50bps cut.
Our core view remains for 25 bps cuts at the RBNZ’s meetings this week, in September and in November. This would take the OCR to a trough of 1.50%.Consistent with this view we see NZ 2-year swap trading toward 1.80% in the months ahead. Yesterday 2-year swap closed at 1.96%. NZ 10-year swap closed down 2 bps, at 2.47%.
Yesterday our NAB colleagues made some changes to their RBA view. They now anticipate the RBA will make two more 25 bps cuts in 2017, taking the cash rate to a new low of 1.0%. They expect AU CPI inflation to remain below the RBA’s target band for an extended period, while structural shifts in the economy and modest economic growth put pressure on the labour market in the longer-term. They are not as quiescent as the RBA with respect to house prices. They are also not convinced lower rates will have a material impact on inflation. But they do expect the RBA will react by providing further support.
It would appear there are some similar themes playing out on either side of the Tasman. For now, NZ-AU 2-year swap spreads remain just below 30 bps.
US 10-year yields have traded lower from the early hours of this morning alongside a modest decline in global oil prices. Data released overnight also confirmed a widely discussed theme of poor US productivity growth. In the early hours of this morning an auction of 3-year Treasury bonds attracted good demand. The bid-cover ratio at almost 3x was its highest this year. Look out for an auction of 10-year Treasuries tonight. US 10-year yields have traded down to below 1.55%. We see continued stiff resistance to yields breaking above 1.63% in the near-term.
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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