By Kymberly Martin
NZ swap yields ended the week little changed at the short-end, but with curves slightly flatter.
Bonds sold off around 5bps over the course of the week.
NZ short-end swap yields continue to trade in the upper-end of ranges that have contained them for the past 8 months.
As we approach the RBNZ meeting on Thursday the market prices around a 15% of a 25bps rate cut by mid-year. By year-end however, the market prices a 25% chance of the OCR being 25bsp higher.
We expect a first 25bps hike in December.
We expect, at the meeting, the Bank to play a straight bat with no intention of influencing market pricing. Broad factors such as low CPI inflation, a high currency, spare capacity and even a slower-looking Australia seem reasons to be dovish.
However, the specifics of strengthening economic growth indicators, accumulating evidence of a Canterbury-led construction rebound, a re-inflating housing market, a pick-up in credit, and a less-edgy global picture, especially financially, are reasons to suggest broaching the subject of rate hikes.
We see risks of higher or lower swap yields being quite evenly balanced at present.
The risks are tilted toward RBNZ comments nudging rates higher. However any cooling in offshore sentiment raises risks of a pull-back.
On Friday night, ‘safe haven’ US and German bonds sold off after better-than-expected German IFO data. US 10-year bond yields rose 8bps, to finish the week above 1.94%, right at the top of their range of the past 6 months.
There is plenty of data this week to impact on US yields (with implications for the long-end of the NZ curve). US Q4 GDP is released on Wednesday along with the meeting of the US FOMC. The week then finishes up with the all-important non-farm payrolls on Friday.
Expect volatility, with the potential for US long yields to convincingly break higher if data surprises to the upside.
However Chairman, Bernanke may do his best on Wednesday to dampen down any nascent thoughts in the market, that ultra-loose monetary policy is to be curtailed any time soon.
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