Market likely to respond to dovish tone by pricing in greater chances of cuts in future

By Kymberly Martin

It was a fairly quiet day in NZ swap markets as we head into today’s RBNZ meeting. The market prices less than a 15% chance of a cut at the meeting, but still looks for a 25bps cut in the year ahead.

We do not expect a cut. However, our central view is the market responds to the overall more dovish tone (and likely flattened 90-day bank bill forecast track), by pricing in greater chance of cuts ahead.

Moving toward pricing 50bps of cuts would take 2-year swaps back toward their all-time lows of early June, close to 2.30% (currently 2.59%).

Having seen the market’s response to the RBA meeting earlier in the week, the risk is however, the market responds in relief, and yields hold up. In the case of the RBA, this market response occurred as the Bank cut 25bps, but restated known concerns without emphasising any unexpected negatives.

Overnight, trans-Atlantic data was fairly mixed. Spain failed to auction its maximum target of bonds. The market appears tired of waiting for Spain to officially apply for aid. This would allow the ECB to buy its sovereign bonds in the secondary market through the OMT. The spread between Spanish and ‘safe haven’ German bonds widened from 385bps to 405bps.

US 10-year bonds have rallied in line with German bonds. With yields at 1.59%, bonds are once again at the key resistance levels that have held since August. There is little US data to test this level tonight.

However, EU GDP data will catch some attention tonight, along with ongoing political headlines. The key challenge to US bonds may come from non-farm payrolls tomorrow night.

The ECB and BoE will also announce rates tonight. Both are expected to keep rates on hold at 0.75% and 0.50% respectively.