Soft NZ GDP release, the less hawkish US Fed, and soft Australian jobs report drives NZ rates lower across the curve. But inflation stirring anyway

By Jason Wong

The US 10-year Treasury rate has settled around 2.53%, some 3 bps higher from the rate prevailing at the NZ close.

Higher European rates have been a factor, with German and UK 10-year rates up around 3-4 bps, the latter driven by the more hawkish BoE policy minutes.

As to the likelihood of the next Fed move, market pricing suggests a slightly better than even chance of the Fed moving again in June and about 40 bps of tightening priced in by the December meeting, so a little under another two full rate hikes over the rest of the year.

The softer NZ GDP release, the less hawkish than feared FOMC Statement and soft Australian employment report helped drive NZ rates lower across the curve yesterday.

The 2-year swap rate fell by 4.5 bps to 2.29%, its lowest close since early December.  The 10-year swap rate fell by 10 bps to 3.51%.

The government’s tender of $200m of 2025 government bonds saw an incredible $1.425b of bids, helping long-term NZ bond rates fall by 10-11 bps.

The soft GDP and Fed announcement saw the market price out some expected monetary policy tightening.  OIS pricing for the RBNZ’s November MPS had been locked in at 1.8750%, implying a 50/50 chance of a tightening, almost every day for the past 4 weeks, but that rate fell by a couple of basis points to 1.85%.

Next week’s OCR review is expected to be relatively uneventful, with the RBNZ reiterating its recent policy message

Despite the soft GDP release the risks are heavily weighted towards CPI inflation moving on a higher plane than the RBNZ previously projected.

Daily swap rates

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Jason Wong is on the BNZ Research team. All its research is available here.

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