Market pricing in 50bps of cuts in Australia but RBA may not move just yet

By Kymberly Martin

The entire NZ swap curve closed down 3-6bps yesterday. NZ yields followed AU equivalents lower.

They responded to a slightly weaker-than-expected China HSBC PMI (50.5 vs. 51.5 expected), and pre-positioned for today’s AU CPI release.

The market now prices almost 50bps of further rate cuts from the RBA. This is close to our NAB colleagues’ view.

However, we expect today’s AU CPI data will be subdued (trimmed mean 0.5%q/q), but not low enough to push the RBA across the line for a May easing.

Heading into today’s RBNZ meeting, only around a 30% chance of 25bps rate hike in the year ahead is priced. 2-year swap sits at 2.84%.

We expect today’s RBNZ statement to balance the upside risks of house prices and economic momentum against the downside risks of a stubbornly high NZD.

For swap yields to fall much further would require the market to once again start pricing expected RBNZ cuts.

The 2-10s swap curve has flattened a little further, to 100bps, the lower end of the 95-125bps range we believe will contain the curve for much of the year.

A further 6bps fall in NZ 10-year bond yields has taken them back to last year’s all-time lows at 3.22%.

This Friday the DMO will auction $120m of NZGBs, though probably insufficient to completely ease the current tight NZGB supply-demand dynamics.

Overnight, despite a fairly soggy Eurozone composite PMI release German 10-year bond yields rebounded from their lows to close at 1.26%.

Peripheral Eurozone spreads continue to narrow. Spanish-German 10-year spreads (3.02%) are now at their tightest level since January last year, before they spiked above 6.0%.

US 10-year yields traded as low as 1.64% after the European PMI release before launching a return to 1.70%.

Around 5.00am this morning yields gapped again to 1.64% after the Associated Press had its Twitter account hacked, announcing an explosion at the White House. This false information was quickly denied and yields returned to trade at 1.70%.

It will be a busy Trans-Tasman today. The RBNZ will announce rates at 9.00 (NZT) and AU CPI data will be released at 1.30pm (NZT).

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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