Market pricing in more than 50% chance of 25bps rate cut by year end

By Kymberly Martin

NZ swap markets closed little changed yesterday. Short-end yields consolidated their sharp move southward in previous days.

The market continues to price more than a 50% chance of a 25bps RBNZ rate cut by year end.

The 2s-10s swap curve remains around 112bps. We see the potential for further steepening, though we would begin to taper positions above 115bps.

NZ curve direction will be increasing dependent on moves in US 10-year yields.

Overnight, US 10-year bond yields were relatively contained within a 1.63% to 1.67% range. There was little data overnight to drive market direction, and an eerie quiet appears to have descended on post-Olympic markets.

German 10-year yields also dabbled in a 1.38%-1.44% range. Peripheral European spreads traded sideways, though still at relatively elevated levels.

There will be a bit more substantial for markets to focus on this evening. In the Eurozone, Q2 GDP will be released along with the German ZEW survey.

The US will release retail sales data. The market expects a bounce in July to 0.3%m/m from -0.5% previously. Ahead of tonight’s data we expect another relatively subdued day in NZ markets.

However, in quiet markets the release of NZ retails sales data may gain some attention. Along with the market we expect a 0.7% bounce in Q2 from the -0.6% dip in Q1.

Also of interest will be today’s release of data showing non-resident bond holdings. Recently this data has ticked up to 62%, underlining the importance of global demand in influencing NZ bond prices.