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A stronger-than-expected Chinese PMI changes expectations

Bonds
A stronger-than-expected Chinese PMI changes expectations

by Kymberley Martin

NZ swap yields continued to grind lower on Friday. The curve flattened further.

NZ mid to long-end yields closed down 4bps on Friday following offshore moves, particularly the recent slump in AU yields. AU 2-year swap yields have fallen around 40bps in the past fortnight, as the market has increased the odds of a rate cut from the RBA this Tuesday.

Pricing is now close to a 45% chance of a cut.

Over the weekend, a much stronger-than-expected Chinese manufacturing PMI was the highest reading in a year. At the margin, this release will cause the market to revisit expectations for a RBA cut. Expectations of a cut are premised on perceived global/China growth risks as much as recent AU domestic data softness.

In the meantime, the NZ-AU 2-year swap spread has surged higher by around 20bps in the past week, to the highest level since November. This suggests it may now be attractive to receive NZ 2-year on spread to the AU equivalent. Despite this, we continue to see support for the NZ 2-year at the 3.0% level, underpinned by fundamental pay-side interest.

The 2s-10s curve has flattened further to 140bps. With the short-end quite well supported, its shape will continue to be dictated by offshore influences on the long-end.

In this respect, the US 10-year yields tracked sideways around 2.14% for most of Friday night, before climbing to 2.21% in the early hours of Saturday morning. German equivalents continue to languish near their lows at 1.79%.

In a relatively light NZ data week, Wednesday morning’s Crown Financial Statements will provide some insights on how things are tracking, with possible implications for Government funding requirements (bond issuance) going forward. Elsewhere, we have a number of central bank announcements this week.

Today, expect the downward pressure on NZ yields to abate for now, given the Chinese data release over the weekend, and the rise in US long yields into last week’s close.

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