By Kymberly Martin
NZ swap yields closed up 6-9bps yesterday. Overnight, US 10-year yields failed to break higher.
Swap yields rose as the market reduced OCR cut expectations post the RBNZ announcement. It was a fairly even-handed statement as we anticipated, with new Governor Wheeler not really revealing his colours at this point.
Still, it was less dovish than the market expected. Risks to the global outlook are now seen as “more balanced”. The statement also downplayed the low Q3 inflation reading, saying “while annual CPI inflation has fallen to 0.8 percent, the Bank continues to expect inflation to head back toward the middle of the target range”. This is consistent with our own view that inflation rebounds to 1.5%y/y in Q4, building thereafter.
The market now prices just 20bps of rate cuts by mid next year. 2-year swaps closed up 9bps at 2.64%. We see them now close to mid-range, ranges that will likely hold until well into next year. The 2s-10s curve has flattened a little further to 111bps and near-term we expect this flattening bias will probably be maintained.
Today’s DMO auction of $100m of NZGB19s and $150m NZGB23s will be watched with interest for any impact from this week’s re-launch of inflation-indexed bonds. Could strong demand for IIBs detract from demand for traditional bonds, or could the IIB’s launch have raised the profile of NZ bonds generally to global investors?
It was a relatively placid night. Our risk appetite index maintained a 69% level and markets navigated positive and negative US data outcomes. The best news of the night came from the UK where Q3 GDP recorded a surprise 1.0%q/q gain prompting the Bank of England to say the “UK economy is past the worst”.
US 10-year yields tried several times to break above 1.85% without success, sitting at 1.84% at present.
Tonight, US Q3 GDP will be released along with the final reading on the University of Michigan consumer confidence survey. Consensus expects GDP to rise 1.8%q/q (ann). The key for markets will be if an outcome of this magnitude will be sufficient for US 10-year yields to break through the 1.85% level. A successful break would open the way for a rise to 2.0%.
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