By Kymberly Martin
It was a fairly unexciting day in NZ markets yesterday, ahead of today’s RBNZ meeting. Overnight, the German Constitutional Court ruling passed without drama.
NZ swap yields closed little changed yesterday, with yields still very much mid-range. The market prices virtually no chance of rate action at today’s RBNZ meeting. It still prices around 75% chance of a 25bps cut within 9 months.
We expect today’s meeting to provide very steady commentary, not least because it is Governor Bollard’s last meeting. We expect the details of the MPS will once again imply the next move to the OCR will be up.
Still, with the persistence strength in the NZD TWI and NZ data being less robust of late the RBNZ will likely keep the door open for a cut ‘if necessary’. This may see the market move to price an increased probability of cuts.
NZ bonds markets were also uneventful yesterday. However, overnight US and German ‘safe haven’ bonds sold-off after the uncontroversial ruling by the German Court on the legality of the ESM. A positive surprise on EU industrial production numbers also helped.
US 10-year bond yields rose from 1.70% to 1.77%, now approaching key support just above 1.80%. As a consequence, NZ-US 10-year bonds spreads have narrowed to 183bps. This is the lower end of their range, and we therefore expect NZ bond yields to rise today. This is also suggested by the move seen in AU futures overnight.
Non-core European bond yield spreads to German equivalents have also narrowed, as a sign of European funding concerns have diminished following the German ruling. Tonight, the better mood regarding Europe will be tested when Italy returns to markets to sell bonds.
The key local event today is obviously the RBNZ meeting, though the BNZ manufacturing PMI will also be released. Then it will be on to the US FOMC meeting, scheduled to announce early Friday morning, NZT.
There is a high likelihood that QEIII will be announced in some form, and that some of the assets to be purchased will be agency-MBS (mortgaged backed securities). The Fed is also likely to push back its guidance on how long The Fed funds rates will remain at ‘extremely low’ levels.
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