By Kymberly Martin
NZ swap yields closed little changed. NZ 10-year bond yields closed up 2bps. US yields failed to break 2.0%.
Yesterday’s balanced, if slightly hawkish RBNZ statement had a limited impact on market pricing. The market had already moved since the start of the year to price out almost all expectation of OCR cuts.
The market now prices around a 35% chance of a 25bps hike by year-end. But it seems reluctant to go much beyond this level, which has represented maximum expectations over the past 8 months.
We believe it is likely still some time until the market prices our central view of a 25bps RBNZ hike in December and steady hikes thereafter.
Still, domestic data watching has become more critical. The risk is now that the market is nudged toward our view sooner rather than later. The next key data in this regard will be Thursday’s unemployment release.
Conversely, the risk of a knock lower in yields is presented more by the global backdrop. If current buoyant sentiment and apparent complacency toward global risks is undermined, the market may re-price the chance of a RBNZ rate cut.
NZ bonds continue to sell-off from previously ‘expensive’ territory relative to both swap and AU bonds. 10-year swap spreads have now narrowed to 28bps from close to 45bps a fortnight ago. We see further to go.
After a fairly uneventful US Fed statement yesterday, US 10-year bond yields dribbled lower to touch 1.97% early this morning. Then, following a better-than-expected Chicago PMI they attempted, and failed, to again break above 2.0%.
Still, how US yields end the week will be dependent on tonight’s all-important payroll data. A strong report could be the catalyst required to push long yields higher. US long yields are a key influence on the long-end of the NZ curve at present.
Domestically, the key to watch today will be a speech from RBNZ Governor Wheeler in Canterbury. The DMO also auctions $100m of NZGB 17s and $100m ACGB 23s.
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