By Kymberly Martin
NZ yields consolidated their recent gains, closing little changed on the day. They showed little reaction to the NBBO survey yesterday.
2-year swaps closed at 2.78%, now eyeing resistance around 2.90%. However, the potential for disappointment from the ECB/Eurozone remains high in the near-term.
The chances of a pull-back in yields are therefore also high. The market now prices that the NZ Official Cash Rate will be little changed in a year’s time.
We anticipate that by a year’s time RBNZ gradual rate hikes will be underway.
Overnight, the recent wave of market optimism wavered slightly. It was not helped by comments from the German finance ministry that dampened prospects for an ESM banking license.
In addition, Spain’s budget deficit increased in June from 36.3b to 43.1b.
There was renewed demand for US and German “safe haven” bonds. German 10-year bond yields declined from 1.38% to 1.28%. Spanish–German bond spreads ticked up again by over 20bps, to 546bps.
Today, Chinese and European PMI data will be delivered along with the US ISM Manufacturing.
However, all focus will be on the US FOMC rate decision early tomorrow morning (NZT), ahead of the Bank of England and ECB meetings tomorrow. Market expectations for further policy support is now high, so the risk of disappointment is also elevated..
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