By Kymberly Martin
NZ swap yields closed down 2-3bps across the curve yesterday, following the moves previously seen offshore. The 2-10s curve closed a little flatter, at 104bps.
The market now prices around a 40% chance of a rate hike from the RBNZ in the year ahead. There is little on the domestic agenda to challenge this view today.
However, today the RBA will release its Minutes from its April meeting. The RBA’s recent communications portray comfort with currently being ‘on hold’, but maintain a mild easing bias.
Following the array of below expectations Chinese data yesterday, markets have increased expectations for RBA cuts in the year ahead. 37bps of cuts are now priced.
Our NAB colleagues see the possibility of a further 50bps of cuts, but weighted toward later in the year.
As a consequence of the related pull-back in AU short-end swaps, NZ-AU 2-year swap spreads have continued their upward path, to sit at -8bps this morning.
With time, we expect this spread will move well into positive territory. This represents the divergent central bank rate paths we see on either side of the Tasman.
Overnight, equity markets were weak and the US Empire Manufacturing survey disappointed (3.05 vs. 7.00 expected). US 10-year yields remain at the crucial level of 1.69% this morning.
Meanwhile gold continues to steal the limelight, falling a further 9% overnight, dragging most other precious metals along for the ride. The spot gold price is now down almost 15% since the end of last week.
The apparent failure of this ‘safe haven’ asset will likely only increase demand for alternatives such as US Treasury bonds.
Meanwhile, closer to home, the NZ bond market yesterday absorbed the maturity of the NZGB 2013 bond and settlement of the new NZGB 2020 bond.
NZ 10-year bond yields closed down around 5bps. They are now around 12bps off last year’s all-time lows. There is no DMO bond auction this week.
Tonight, the crucial data for global risk sentiment will be the release of the German ZEW economic survey. Eurozone and US CPI data will also be released. This will likely confirm that, at least for now, inflation is not one of the numerous challenges these regions must grapple with.
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