By Kymberly Martin
It was another fairly quiet day in NZ swaps, to end the week with yields little changed. The market continues to assign around a 90% chance of a 25bps RBNZ rate cut in the year ahead.
The test for these expectations will come with Tuesday’s NZ Q3 CPI release. The market looks for a 1% outcome and we formally have a 0.9% forecast.
Thereafter we see inflation picking up to a 1.6%y/y rate in Q4, before continuing to build next year. The market may however, extrapolate a low-side outcome to a continued downward trend in inflation.
It may thereby increase expectations of RBNZ rate cuts. This may create opportunities to pay at the short-end of the NZ curve. Tactically we would look to pay 2-year swap at 2.55% and 5-year below 3.00%.
On Friday night, the mood in markets was a little more sober despite a positive surprise for the University of Michigan consumer confidence survey. There was solid demand for US ‘safe haven’ bonds at auction.
US 10-year yields slipped a little further to 1.66%. We continue to see fairly solid resistance around 1.60% and do not expect yields to revisit lows below 1.40%. This should limit any further flattening of the NZ curve.
While domestic data (PSI. CPI, ANZ job ads and migration) will have its moment in the sun this week, there is plenty on the global front to impact risk appetite.
Key amongst data will be tonight’s US retails sales, Tuesday’s German ZEW survey, Wednesday’s US housing starts and Thursday’s US Philadelphia Fed survey.
Any shifts in risk appetite will likely be reflected in demand for US 10-year bonds. We will be looking to see if key resistance will hold. We also see the top of the trading range for 10-year yields at 1.90%, for now.
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