RBNZ locks itself into a November cut, even if CPI surprises higher next week. Further easing possible. But rates in rest of world are rising

By Jason Wong

The minutes of the FOMC’s September meeting were released at 7am this morning and they were keenly awaited by the market.  Key takeaways were that “several” voters said it would be appropriate to raise rates relatively soon and “several” meeting participants who supported waiting said their decision was a close call.

Ahead of the minutes, UST yields continued to push higher, reaching levels not seen for four months.  The 2-year rate reached a high of 0.89% while the 10-year rate reached as high as 1.80%.  Much of the gain reflects rising inflation expectations.  The 5yr-5yr forward break-even inflation rate is up about 25 bps over recent months.

Following the release of the minutes we saw a bid emerge for Treasuries, and yields fall slightly.  The 10-year rate currently sits at 1.77%.

European yields were higher overnight, with the UK 10-year rate up 6 bps to 1.04% and Germany’s 10-year rate up 4 bps to 0.06%.

There was strong demand for Australia’s issue of a 30-year bond, the longest ever issued.  After receiving AUD13 bln of bids, the government issued $7.6 bln bonds at a yield of 3.27%.  The selling of long-dated Australian bonds in the lead-up to make way for this issue might have had some spillover onto the NZ curve.  With this issue now out of the way, a return to normalcy can proceed.

In local trading yesterday, there was an upward bias to yields, reflecting global forces.  The 2-year swap rate closed 2 bps higher at 2.08% while the 10-year rate rose 3 bps to 2.67%.

The OIS market gained further conviction that the RBNZ would cut rates next month, following the RBNZ’s McDermott’s speech on Tuesday afternoon.  The 10-Nov contract closed at 1.79%, suggesting that the market thinks it’s pretty much a done deal.  We agree.  It would be awkward for the RBNZ to backtrack from this now, even with a positive CPI surprise next week.  The risk of further easing next year remains real, with the 10-Aug-2017 contract closing at 1.66%.

There are lots of second-tier NZ economic releases today.  The latest REINZ report will be closely watched for any signs of fresh LVR restrictions impacting on sales and pricing ahead of their introduction.  The fiscal accounts will highlight the strength of the government’s books and paving the way for some fiscal stimulus in the years ahead.