Upbeat news lifts all boats. RBNZ and RBA to make watched comments, Eyes then shift to signals from US Fed

By Doug Steel

Global bond yields have pushed higher overnight, buoyed by the upbeat news and higher oil prices.

US 10-year Treasury yields currently sit around 6 bps higher at just under 2.32% having ground higher all night in a similar trajectory to oil prices. Similar moves were seen in 10-year yields across Europe.

Curves also generally steepened ahead of the Fed tomorrow morning. US 2-year Treasury yields rose a relatively smaller 3 bps.

These themes are likely to be reflected in the local rates market today, extending yesterday’s moves. NZ 10-year swap yields closed up 1.5% at around 3.28% yesterday, while 2-year swap yields rose less than 1 bp to 2.23%. Further anchoring of the short end by RBNZ comments this morning would reinforce the steepening pressure.

There is more event risk over the next 24 hours including the AU Q2 CPI at 1pm NZT. Our NAB colleagues expect the CPI to show headline inflation at 2.1% y/y and underlying inflation at 1.7% y/y, so close to market consensus and in line with RBA expectations. If this occurs, it shouldn’t cause much sustained movement.

RBA Governor Lowe’s speech just after 3pm NZT on ‘Labour Market and Monetary Policy’ will be closely followed. The speech might have an upbeat tone given the  recent run of jobs figures but should reinforce the Bank’s neutral position regarding the outlook for rates.

Last but not least, the FOMC decision is due 6am tomorrow NZT. The Fed is almost certain to leave rates on hold. The main questions are around future guidance. Will the Fed firm up guidance on when it expects to commence the process of balance sheet adjustment and will there be any toning down on further tightening language?

Current consensus, and our view, is that the Fed will indicate timing of its balance sheet reduction in September and wait until December to lift rates again.

Doug Steel is a senior economist at BNZ Markets. All its research is available here.