UST yields higher despite lower oil price. Eyes on US core PCE watched closely by the Fed. Local eyes on RBNZ Financial Stability review

By Kymberly Martin

There was a modest flattening of the NZ swap curve yesterday as long-end yields dipped while short-end yields closed little changed.

Overnight, US 10-year yields pushed up from 2.31% to 2.34%.

NZ 10-year swap closed down 3 bps, at 3.22% yesterday. More broadly, yields have been consolidating in a 3.15-3.35% range over the past fortnight, following their surge higher from early October. US 10-year yields have consolidated over the same period. We anticipate next year that NZ 10-year swap will push on up to trade a range around 3.60%. This is consistent with our view that US 10-year yields will trade a range around 2.50%. However, we are wary that with numerous risks in sight, that range could be quite wide.

Overnight, US 10-year yields traded higher despite a notable pullback in the oil price (WTI -3.7%). US short-end yields also pushed a little higher. The market continues to fully price a Fed hike in a fortnight’s time. Fed fund futures also now price a Fed funds rate at around 1.60% by mid-2019. Mid this year, that pricing had been at just 0.7%. However, current market pricing still falls a little short of the Fed’s own median ‘dot points’. These project a Fed funds rate above 2.50% by 2019.

Today the RBNZ will release its Financial Stability Report, followed by the Governor’s testimony to Parliament in the early afternoon. Housing and dairy sector risks will remain in focus. There will likely be some assessment of the latest LVR restrictions for housing loans. For now, the Bank’s emphasis for housing remains on financial stability issues (to be dealt with via macro-prudential tools) rather than inflation issues (to be dealt with via the OCR). We would need to see house price appreciation feeding through to more generalised inflation, if the Bank’s emphasis was to change.

Tonight’s focus will be on OPEC’s meeting in Vienna. The release of the US core PCE deflator may also gain some attention. This is the Fed’s preferred inflation measure. The core PCE deflator is clearly on an uptrend since it bottomed at 1.3% mid last year. But at 1.7%, it does not yet provide an impediment to the Fed’s proposed gradualist approach to tightening. A push up in the direction of 2.0% in coming months, however, might get the market to further re-think the medium-term path for the Fed funds rate. 

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