RBNZ's official 90-day bank bill track still implies a first 25bps hike around Q3 next year

By Kymberly Martin

Overall the market’s response to yesterday’s RBNZ meeting was fairly muted.

Overnight US 10-year yields consolidated around 2.20%.

NZ short-end swaps initially dipped a fraction after the meeting but ended little changed on the day. The market prices around a 25% chance of a 25bps hike from the RBNZ by year-end and now prices 28bps of hikes by April next year.

This is a reasonable representation of risks around our central OCR forecasts. i.e. a first 25bps hike in March followed by a further 25bps hike in June.

However, in its official 90-day bank bill track the RBNZ still implies a first 25bps hike around Q3 next year.

Our strategic view remains one of higher yields across the curve by year-end and beyond. We forecast 2-year swap at 3.40% by year-end (currently 3.02%) and 5-year at 3.90% (currently 3.65%).

These levels would still be some way short of ‘fair value’ based on our own OCR trajectory, as we assume that markets may remain reluctant to fully price the pace of OCR hikes ahead.

In the very near-term, given the RBNZ’s reticence, in may be difficult for 2-year swaps to break through the 3.0% to 3.1% window that has marked their peak year to date.

Meanwhile the 2-10s curve remains around 120bps. The long-end of the curve will continue to take its cue from offshore moves.

Overnight, in the backdrop of slightly stronger than expected US retail sales data, US 10-year bond yields consolidated around the 2.20% level, sitting at 2.18% currently.

Today, the BNZ PMI is released. We would expect this to confirm the story of fairly broad-based expansion in the manufacturing sector.

The Bank of Japan will also release its most recent minutes which may impact on general risk appetite, as it provides some insight into the potential for further stimulus.

The US will release industrial production data and the University of Michigan consumer confidence survey.