By Kymberly Martin
It was a dead day in NZ markets. Yields closed almost unchanged. Overnight, US 10-year yields pushed up to 2.67%.
With a quiet day at home all eyes were across the Tasman for the RBA meeting. Its assessment of the outlook for the economy has become a little more positive, although still uncertain. Rising house prices were seen as positive in that this should encourage investment in new housing construction.
In contrast to RBNZ, no concerns of “over-valuation” were flagged. The RBA maintains a mild easing bias.
Our NAB colleagues see low rates continuing for a long time ahead. Another rate cut is still a possibility, although this would require the current economic optimism to fade. The market still prices around a 20% chance of a further 25bps cut in the year ahead.
Overnight, US 10-year yields began to rise in ahead of the ISM non-manufacturing release. The upside surprise then pushed yields higher to sit around 2.66% this morning (from 2.60% last night).
The move was mimicked in Aussie bond futures, suggesting NZ long-end yields will open up today. We continue to see a 4.50-5.00% range for NZ 10-year bonds in the year ahead and a 4.80-5.30% range for 10-year swap.
Today, the LGFA will hold its tender of $115m of bonds across its four maturities. We expect demand at this tender to be more solid than at recent events that have attracted lacklustre demand.
Today the domestic focus will be on the NZ employment report. The risks are likely that a larger than expected decline in the unemployment rate (consensus 6.2%) causes the market to firm up its expectations for OCR hikes. This could see higher yields.
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