Australia cuts but markets see much less need for further easing. Bond yields rise. Eyes on NZ employment data

By Kymberly Martin

NZ swaps closed up 1-2 bps across the curve.

Overnight, US 10-year yields pushed up to 2.19%.

In a day of little NZ data flow NZ swaps drifted a bit higher across the curve. The 2-10s curve has steepened up to 40 bps as 2-year closed at 3.51% and 10-year at 3.91%.

At the close of the NZ market the RBA delivered a rate cut, taking its cash rate to 2%.

The immediate response from AU yields was to gap sharply lower, but this proved very short-lived.

The market then dissected the RBA’s accompanying statement. This showed the cut was less a sign of desperation and more to “reinforce recent encouraging trends in household demand.”

Much of the discussion was on improving momentum as opposed to concerns regarding weakness.

Our NAB colleagues see a high hurdle for further easing in the near-term. The market now prices less than a 50% chance of a further cut. AU 2-year swap rebounded from lows below 2.10% to end the day around 2.22%.

These moves will likely help to support NZ short-end swap yields today despite a modest further fall in dairy prices at the overnight GDT auction.

Overnight, the sell-off in both German and US bonds continued. German 10-year yields now trade at 0.52% while US equivalents have pushed up to 2.19%, the 200-day moving average. The next line of support for Treasuries is seen when yields reach early-March highs of 2.26%. Near-term this may serve to cap the trading range, though ultimately we see 10-year yields trading up to 2.50% by year-end.

Today it will be all eyes on the NZ employment report.

The rates market will be particularly interested to see the presence or absence of inflationary pressure in the likes of average hourly earnings and the labour cost index.