By Kymberly Martin
It was a very quiet day in NZ markets on Friday. Swap yields closed the week 5bps lower at the short-end, with 10-year swaps 14bps lower. This has flattened the swap curve to levels where we would look to begin positioning for steepening.
The 2s-10s curve is now at 100bps, just a little above the late August lows of 93bps. From this level it then steepened markedly.
Movements in the NZ curve will be highly influenced by moves in US long yields. We believe that US 10-year bonds are reaching levels where resistance should be felt.
Despite weak US data and the general heavy tone in equity markets on Friday night, US 10-year yields traded in a familiar range, closing at 1.63%. We do not see yields re-visiting their late July lows below 1.40%.
On Friday, AU data showed business credit contracted 0.1% in Aug following a 0.1% gain in July. This is a marked slowdown from recent months (more like 0.6%). It somewhat contradicts the RBA’s contention that business credit has been picking up. As such, this data falls on the ‘reasons to cut’ side of the RBA ledger for Tuesday’s meeting.
Further rate cuts are widely expected from the RBA (including by us). However, it will be a close call as to whether the RBA cuts this week. The market prices a 66% chance of a 25bps cut.
The Bank of England and ECB also announce rate decisions this week on Thursday. The Fed releases it September minutes.
There is little on the NZ data agenda this week. Today yields will likely open under downward pressure given the softness in risk sentiment at the end of the week, and the lacklustre HSBC PMI over the weekend.
We continue to look for opportunities to pay NZ 2-year swaps at around 2.55% (currently 2.63%), but keeping stops tight.
If sentiment toward Europe deteriorates rapidly, the market could then push on to price up to 50bps of RBNZ cuts, taking 2-year back to early June lows around 2.35%. We would continue to see this as an opportunity to pay however, as we believe the RBNZ’s hurdle level for cutting rates is high.
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