NZ unemployment at 7.3% does not automatically mean OCR needs to be cut

By Kymberly Martin

NZ swaps closed down 5-6bps across the curve yesterday, following the weak employment report. Overnight, markets consolidated.

Yesterday’s Q3 employment data proved the risk we feared. Unemployment rose to 7.3% (6.6% expected). However, this data does not point directly at the need for OCR cuts.

We expect there will be insufficient evidence ahead of the December meeting for the RBNZ to deviate from its ‘on hold’ stance. We continue to see the March meeting as the earliest probability, if the RBNZ were to cut.

The market now prices around an 80% chance of a cut by mid next year, and 20% chance by year end.

2-year swaps closed within their 6 month range at 2.63%. The 2s-10s curve remains at 104bps.

The DMO’s auction of $250m attracted solid demand with an average 3.3x bid-to-cover ratio. NZ bonds rallied in sympathy with the previous moves seen offshore and after the employment report. Yields closed down 3-4bps across the curve.

Overnight, markets appeared to be without much direction. Equities posted modest negative returns, and ‘safe haven’ US and German yields consolidated around previous day’s levels.

Early this morning however, US 10-year yields gapped 5bps lower to 1.63% after strong demand was seen at an auction of 30-year Treasury bonds. The key resistance level for US 10-year bonds remains at 1.60%.

The Bank of England and ECB both left official rates unchanged yesterday as expected. The BoE kept its asset purchases unchanged at £375b.

In comments, ECB President Draghi reiterated the ECB stands ready to undertake ‘Outright Monetary Transactions’ (OMT), but emphasised governments would need to fulfil conditionality.

Overnight, Spain had no trouble selling its maximum quota of bonds. However, Spanish spreads to German bonds have pushed to their highest level in more than a month.

The market speculates the sovereign remains reluctant to apply for assistance via the OMT.