Core offshore yields surge higher along with the global oil price, boosted by good US jobs data. Expect higher NZ yields and a steeper curve today

By Kymberly Martin

NZ swap and bonds yields pushed higher by 2-4 bps yesterday.

Overnight, core offshore yields surged higher as OPEC announced a deal, resulting in the global oil price being catapulted higher. US 10-year yields sit at 2.40%.

Yesterday morning the RBNZ released its six-monthly Financial Stability Report. This highlighted three key areas of risk; housing, dairy and bank funding costs. This document is strictly not for commentary on monetary policy. However, it was difficult not to notice that low interest rates were mentioned several times as a contributing factor to concerning house price appreciation trends.

We continue to believe that the OCR has troughed. We see it remaining at 1.75% throughout next year before a gradual hiking cycle unfolds in 2018. This is not far from current market pricing. Aligned to this view, NZ 2-year swap closed yesterday at 2.27%.

NZ 10-year swap closed yesterday at 3.26%. However, we believe it will be launched higher today, after moves offshore overnight. Core offshore yields surged higher along with the global oil price. While the WTI oil price rose 9%, US long-dated yields surged higher on increased inflation expectations. A stronger than expected US ADP employment report also reduced any lingering downside risk for Friday’s US payrolls report. US 10-year yields have risen from 2.30% to 2.40%. German equivalents have risen from 0.20% to 0.28%.

In comments overnight, ECB President Draghi said somewhat pointedly that “monetary policy is providing support and space for governments to carry out necessary structural reforms”. This adds to a growing chorus suggesting monetary policy may have reached its useful limits and it is now up to fiscal policy and reform to drive the next leg of recovery. More explicitly, Draghi said “It is up to euro-area governments to act”. Of course attempts by Draghi’s own home government to “act” may be stymied this weekend by a “no” vote in the Italian constitutional referendum. The referendum’s intention is partly to simplify constitutional structures in order to enhance the ability to pass reforms.

Expect higher NZ yields and a steeper curve today. The local focus will likely be the Q3 AU capex report. Ahead of this the market currently prices only around a 15% chance of a further RBA cut in the year ahead.

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