Local interest rates follow the UST rates higher, especially at the long end. Rising oil prices are the driver. No surprises expected from US payrolls report. Aussie capex languishing

By Kymberly Martin

Higher NZ yields and a steeper curve yesterday. Overnight, the rise in core offshore yields continued. US 10-year yields now trade at 2.46%.

Unsurprisingly, NZ long-dated yields followed their offshore counterparts higher yesterday.

NZ 10-year swap closed up a further 7 bps, at 3.33%. This is back toward the highs of the range of the past few weeks. US yields remain the dominant driver. After a continued rise in US Treasury yields overnight, we anticipate further steepening of the NZ curve today.

The NZ 2-10s curve now sits at 105 bps. We continue to target a move to 125 bps in the early part of next year. We see long yields rising further but short-end yields remaining contained while the RBNZ keeps the OCR at 1.75% for a prolonged period.

Overnight, US yields pushed higher as the global oil price continued its post-OPEC meeting surge. WTI oil price futures are up a further 4%. This takes prices back to around USD51.50/barrel, up 15% since earlier this week. The top of the range since mid-year is a little higher, around USD53.70. US 10-year yields pushed up from 2.38% to 2.46%. This is their highest level since July last year. Treasuries may find support as yields approach the mid-2015 highs near 2.50%.

Yesterday, data showed AU private capex was weaker than expected in Q3, at -4%q/q. The unwinding of the mining investment boom continues to weigh on capex data and plans. Our NAB colleagues believe it is unlikely the data hold too much importance for the RBA’s actions in the near-term. The Bank understands that it is not the level of interest rates that is holding back investment.

However, the overall lack of momentum in capital expenditure should reinforce views that the RBA is unlikely to follow the Fed in raising rates any time soon. The risk remains for further RBA rate cuts. The market currently prices less than a 20% chance of a further RBA cut in the year ahead.

Tonight, US payrolls data will be released. However, they will likely hold less potency than usual as the market is already fully pricing a Fed hike on 14 December. The results would likely need to be outlandishly weak for the market to seriously question this pricing (and even then might dismiss a weak print as a statistical outlier). The average hourly earnings data may gain the most attention, as the market contemplates the medium-term trajectory for the Fed funds rate.

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