By Kymberly Martin
NZ yields were little changed yesterday. Overnight, core yields offshore pushed higher following the ECB’s meeting.
US 10-year yields traded from 1.53% to 1.60%.
In the absence of domestic data releases yesterday, NZ yields closed just 1-2 bps higher. NZ 2-year swap closed at 2.00%. Although we believe this will trade below 1.90% in the months ahead, in the near-term it is likely to push higher. We would wait until after next Thursday’s (expected) bumper Q2 GDP release before considering a receive position.
Last night was all about the ECB. The Bank did not offer any further stimulus at its meeting. Looking through its statement and headlines, it contains a hawkish tilt. Certainly the ECB continues to stand “ready to act with all available instruments if needed”. But its forecasts were only modestly changed and the governing council appears not to be swayed by some recent disappointing data.
In his press conference, President Draghi warned of downside risks, but talked of a resilience and ongoing growth in Q3. He saw domestic demand supported by a pass-through of previous policy measures, even though the recovery will be dampened by foreign demand. He said there were further improvements in loan supply conditions to enterprises and households, as well as credit flow across the Eurozone. This was seen supporting the real economy.
In a theme that is gaining traction globally, Draghi also suggested monetary policy needs to be supported by fiscal policy, saying, “countries have fiscal space and should use it”. There was no discussion of extending QE.
German 10-year yields gapped higher on the ‘no change’ announcement. They then traded higher into the early morning following Draghi’s comments. From evening lows below -0.12%, they now trade at -0.06%.
Similarly, US 10-year yields traded from evening lows of 1.53% up to 1.61% currently. An early morning surge in the global oil price also likely helped sustain the upward momentum. The 1.63% level remains a strong line of resistance against yields pushing higher near-term.
Expect higher NZ yields at the open today, with steepening pressure on the curve.
Kymberly Martin is on the BNZ Research team. All its research is available here.
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