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Fall-off in international long yields will flow through here today. Local eyes on September CPI and no surprise expected

Bonds
Fall-off in international long yields will flow through here today. Local eyes on September CPI and no surprise expected

By Kymberly Martin

NZ swap and bond yield pushed higher and curves steepened yesterday, following offshore moves.

Overnight, US 10-year yields traded between 1.76% and 1.81%.

The move in NZ yields yesterday had little to do with domestic developments and rather was a catch-up to Friday night’s offshore moves.

The NZ 2-10s curve has steepened up to 59 bps, its highest level since early-June. Over the medium-term we expect further steepening to 80 bps. However, the move could take a breather near-term if US long yields go through a period of consolidation.

In this regards we note a fairly wide-spread decline in offshore yields from late last evening. Although German and UK 10-year yields had initially pushed higher at the open, they soon drifted back to Friday’s closing levels. Meanwhile US equivalents traded down from intra-night highs above 1.81% to now sit below 1.77%. This will likely apply a bit of downward pressure at the long-end of the NZ curve today.

For the NZ short-end, the key today will be the release of NZ Q3 CPI. We are aligned with consensus in expecting a 0.0%q/q reading, or 0.1%y/y. Although the RBNZ has formally projected 0.2%y/y it has already made clear the error band around this forecast is 0-0.5%y/y. This implies the Bank would need to see a print above 0.5% to be genuinely surprised and consider backing-off a November OCR cut. We see this as unlikely.

Absent a major upside surprise today we see a November cut as fairly close to a done deal. The market now prices this outcome as an 85% probability.

Today, also look out for a scheduled speech from RBA Governor Lowe and the release of the RBA’s meeting Minutes. However, our NAB colleagues do not expect these to trigger any further unwinding of rate cut expectations. The market currently prices only around a 40% chance of the RBA’s cash rate being cut beyond its current level of 1.50%.

Daily swap rates

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Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
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Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
 

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

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