Weak Australian employment data sees NZ-AU 2 year swap yield differential widen to 66bps; BNZ see ultimate margin above 120 bps

By Kymberly Martin

After an initial 4-5bps rise in response to the RBNZ’s statement, NZ yields closed little changed yesterday.

The first-page summary of the MPS didn’t give much away. However, it was the RBNZ’s adjustment to its forecast track for 90-day bank bill yields that was notable.

The implied starting point of rate hikes was moved forward from end Q3 to end Q2 next year. This in itself was not a surprise for a market that was (and is) already pricing a March start to the hiking cycle. But the RBNZ also lifted the entire rate track by 50bps.

The rate track is still somewhat flatter than our own. The RBNZ sees the OCR around 4.50% by end Q1 2016, whereas we see the OCR at that level by mid-2015.

The market’s initial response was for yields to rise by around 5bps. However, after the weak AU employment report in the afternoon yields pulled back to close little changed. 2 and 5-year swap closed at 3.52% and 4.50% respectively. NZ 10-year bond yields closed at 4.76%.

By contrast, AU swap yields dropped sharply after the employment data. AU 2-year swap closed down 8bps at 2.88%. NZ-AU 2-year swap spreads have widened back out to 66bps after falling to as low as 52bps earlier this month. Ultimately we see this spread peaking above 120bps next year, reflecting diverging monetary policy on either side of the Tasman. The market now prices an 80% chance of a further 25bps RBA cut by mid next year.

Overnight, another auction of USTs, this time for 30-year maturities, attracted good demand. US benchmark 10-year yields consolidated around the 2.89% level.

We expect today’s domestic data should reiterate the now familiar story. i.e of a fairly buoyant economy where current inflation is still subdued.