By Kymberly Martin
NZ swap yields closed down 2-4bps yesterday. Overnight, US bonds failed to sell-off.
Heading into today’s RBA meeting, NZ swap yields have slipped a little further. The market now prices 27bps of RBNZ rate cuts in the year ahead, though still only a 15% chance of a cut this week.
2-year swaps yields, at 2.56%, are now only 6bps from the bottom of their 5-month range. 10-year swaps are 15bps from all-time lows achieved in late July.
Today, we expect the RBA will cut rates by 25bps, maintaining an easing bias. The market prices a 90% chance of a cut today. If delivered, expect AU and NZ short-end yields to dip further.
Overnight, markets were relatively directionless. Final readings of European PMI provided little surprise, but confirmed the region’s manufacturing sector remains in contraction.
However, the US manufacturing PMI unexpectedly fell back into contraction (49.5 vs. 51.4 expected). This re-ignited demand for US ‘safe haven’ bonds, lacking earlier in the evening. 10-year bond yields that had risen as high as 1.65% fell back to 1.63%.
Today, the ANZ commodity price index will be released. We expect this to consolidate recent gains. This will be important from the RBNZ’s perspective, as the Bank will likely be more tolerant of a stubbornly high NZD in the backdrop of supportive commodity prices.
At 4.30pm (NZT) it will be all eyes on the RBA. Tonight, the Bank of Canada will also announce rates and is expected to keep rates at 1.00%.
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