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US core infation up to +2.6% in past 3 months, bond investors repositioning. Local eyes on Fonterra payout forecast

Bonds
US core infation up to +2.6% in past 3 months, bond investors repositioning. Local eyes on Fonterra payout forecast

By Raiko Shareef

NZ interest rates inched higher on Friday, in spite of lower global bond yields.

US Treasury yields more that reversed early-session falls, after US inflation data printed stronger than expected.

Despite continued interest from the offshore community to position for near-term RBNZ rate cuts, short-end NZ rates edged higher for the second day on Friday.

The market already prices a 50% chance of a 25 bp rate cut in June. Barring a very low estimate from Fonterra for its 2015/16 milk payout, there is little local data due this week that might foreseeably cause this pricing to extend.

US Treasury yields resumed their slide at the open, but unexpected strength in US inflation data caused a sharp-sell-off. Core CPI inflation (ex food and energy) rose by 0.3% m/m, only just beating expectations.

But much has been made of the acceleration in core inflation, which is now tracking at a 2.6% annualised rate in the last three months, the highest since August 2011.

The sharp reaction across markets perhaps says more about investors positioning (increasing scepticism of 2015 US rate hikes) than of the strength of the data itself.

It is likely to be an extremely quiet (and illiquid) start to the week, with both US and UK markets closed.

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Raiko Shareef is on the BNZ Research team. All its research is available here.

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