By Kymberly Martin
NZ swaps closed down 3-5bps yesterday in sympathy with the AU move. Overnight, US 10-year yields slipped back toward 2.84%.
NZ 2 and 5-year swap closed at 3.79% and 4.59% respectively. With less than two weeks now until the end-January RBNZ meeting the market still prices around a 30% chance of a hike at the meeting, and around 175bps of hikes in the coming two years. By contrast we expect a first hike in March but at least 200bps of hikes in the coming two years.
But yesterday’s shift down in NZ yields was less to do with domestic developments and more to do with moves across the Tasman.
On the back of the weak AU employment report yesterday AU swaps fell sharply. For example, AU 2-year swap fell 10bps to 2.84%. The market now prices slightly more than a 50% chance of an RBA rate cut by Q3 this year. We maintain our view the AU unemployment rate will rise over 6% in coming months, putting pressure on the RBA to cut again by mid-year.
Yesterday, NZ-AU 2-year swap spreads pushed up to 101bps, their highest level since late 2008. We see spreads peaking around 140bps mid this year.
Yesterday, NZ bond yields closed down 1-5bps with a notable flattening of the curve. Data yesterday showed that foreign holdings of NZGBs remained steady in December at 65.1%, though down from a peak of 69.1% in May last year.
Overnight, US benchmark 10-year yields trundled sideways around 2.88% before dipping to 2.84% early this morning. Early this morning core US CPI data came in line with expectation at 1.5%y/y. In comments overnight Fed chairman Bernanke defended the policy of QE saying it had assisted the economy without posing inflation risk. Although the Fed remains “extraordinarily sensitive” to the prospect of financial market instability, he did not think that was a concern at this point.
Today, there is little on the data agenda on either side of the Tasman. Tonight, UK retail sales data will be released along with US industrial production, December housing starts and the University of Michigan Confidence survey.
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