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Markets no longer price in a full OCR cut. BNZ pushes back its estimate. RBNZ can find many excuses not to cut

Bonds
Markets no longer price in a full OCR cut. BNZ pushes back its estimate. RBNZ can find many excuses not to cut

By Jason Wong

The US 10-year Treasury rate traded in a tight 1.82%-1.86% range overnight, and is currently flat on the day at 1.84%.

The Markit PMI index came in a bit softer than expected, but this series is not given nearly as much attention as the ISM index, due early next month.

The US 2-year rate is up 2 bps to 0.89%.  The Fed’s Williams got the market’s attention when he said that two to three 2016 hikes was still “about right”.  While Williams is a non-voter, he is often seen to be closely aligned with Yellen, so his words carry more weight than some other FOMC members.  The first meeting with better odds than a coin toss of the Fed tightening, based on OIS pricing, is July, where a 55% chance is priced in.  OIS pricing for calendar 2016 is +30bps, so just over one rate hike (note that I mis-reported this yesterday at less than a full hike).  So if Williams is right, then there is scope for US Treasury yields to rise further as the year progresses.

Local rates continue to see upward pressure, as conviction in further RBNZ easing evaporates. The OIS market no longer has a full 25bp cut priced in, with a trough of 2.03% priced into the curve for February 2017.  Yesterday, BNZ economists changed their call to defer the next easing to August, from June.  While a possible June cut remains a line-ball call, the RBNZ has proven to be a “reluctant cutter” and there are plenty of available excuses – such as the UK referendum vote, Fed policy, recent data, and the data calendar – to defer any possible easing.

The 2-year swap rate closed at 2.335%, up 4.5bps and the highest close since the March rate cut decision.  We see the 2-year rate as being near the top of its expected trading range.  We do not see the risk of a sharp rise in short-end swap presenting itself until next year.  A flattening of the yield curve continued, with the 10-year rate up by 2bps to 2.93%.

Daily swap rates

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

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2 Comments

BNZ were completely taken by surprise when the first cut happened. Don't depend on their economists being in touch with what's happening. That said RBNZ aren't going to cut unless CPI goes deflationary. Commodities need to surge down and at the moment the oil price is unusually high given oversupply.

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"Don't depend on their economists being in touch with what's happening." yeah, but do depend on them knowing a hell of a lot more about the RBNZ and what their plans are than you are I...

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