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Foreigners holding less NZGBs. November OCR cut may be last. Q4 CPI may be back in RBNZ's target range. International equities and bonds rally together

Bonds
Foreigners holding less NZGBs. November OCR cut may be last. Q4 CPI may be back in RBNZ's target range. International equities and bonds rally together

By Kymberly Martin

NZ swap and bond yield pushed another 3-8 bps higher yesterday with a slight steepening of the curve.

Overnight, core global yields traded lower. US 10-year yields are now approaching 1.74%.

Yesterday morning the long-awaited NZ Q3 CPI data was released. It came in slightly above expectation at 0.2%y/y. This was sufficient for a market, which was clearly long heading into the release, to sell-off quite sharply. NZ 2-year swap closed up 5 bps, at 2.13%, while 10-year closed up 7 bps, at 2.74%.

The market has slightly reduced its pricing for a November RBNZ cut to 80%. Based on the Bank’s indication of its intentions we still consider a November cut to be close to a done deal. However, we see the arguments for further cuts beyond that as increasingly tenuous. Activity data in NZ is generally solid, and we see yesterday’s CPI data marking the bottom of the inflation trend. We believe that Q4 CPI (released 19 January) will lift back into the RBNZ’s 1-3%y/y target band.

As we have previously discussed, as the market starts to acknowledge the end of the rate cutting cycle its attention will turn to the next eventual hiking cycle. Mid-curve yields should rise. This should lead to steepening in the likes of the NZ 1-3s swap curve. This spread has already moved from -5 bps to 9 bps in recent days. We see upside to 50 bps over the medium-term.

Yesterday afternoon, data was released showing the proportion of NZGBs held by non-residents. These had dropped to 65% in September from 66.7% previously. Although this remains above long-term average, it is the lowest level since the end of 2014. A slipping trend appears to be in place since the highs of mid-last year.

Overnight, equities and bonds rallied together. While the Euro Stoxx 50 returned 1.2%, led by the Financials sector, German bond yields declined. From 0.07%, 10-year yields now trade below 0.04%. Equally US 10-year yields have traded lower to below 1.75%. The release of US CPI data caused a bit of a flurry in UST trading in the early hours of this morning. Core CPI was slightly lower than expected at 2.2%y/y. US yields initially dipped, then reversed the move, before a more enduring decline took hold.

This afternoon, the release of a large amount of China data may influence market sentiment into the evening. Tonight the Bank of Canada will meet though no change of policy is expected.

Daily swap rates

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

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