By Kymberly Martin
On Friday, NZ swap yields closed up 3-4bps across the curve, taking yields back to the upper-end of ranges.
Overall, yields showed ‘’V’ shaped trading over the week, returning to trade not far from where they began. The market still prices a small (15%) chance of a RBNZ cut in the year ahead. We do not expect cuts.
Domestically, key data may test expectations this week. We expect Tuesday’s QSBO business survey to firm a fraction from the mild-growth it showed in September. Probably more important for interest rate markets will be Friday’s Q4 CPI release.
We expect annual inflation will creep up a fraction to 1.2%. We see this reading as the start of an upward trend in inflation over the year.
However, for now it is still perilously close to the lower edge of the RBNZ’s 1-3% target band. The market may take such a reading as reason to feel comfortable with maintain pricing of rate cuts ahead.
Demand for NZ bonds remained solid on Friday, keeping yields little changed on the day. Renewed bond supply as DMO auctions resume this week should help ease current tightness in the market.
We therefore do not see NZ bond yields declining much further relative to key offshore counterparts or relative to swap yields.
US 10-year yields finished the week slightly lower than where they started, having failed to convincingly break above the crucial 1.90% level. There is no shortage of US data to impact on yields this week.
Most notable is tomorrow’s Empire Manufacturing and retail sales data, Wednesday’s housing data, Thursday’s Phili Fed and Beige Book and Friday’s University of Michigan confidence survey. Expect some volatility in yields.
In addition, there is a plethora of US Fed members speaking this week. Many scheduled speakers are considered to have ‘dovish’ leanings, though most are non-voting members. However, Bernanke’s words from a speech in Michigan tonight will likely be finely dissected.
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