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Stable or rising inflation expectations cause market watchers to shift rate-cut views. Modest dairy price falls unlikely to alarm markets

Bonds
Stable or rising inflation expectations cause market watchers to shift rate-cut views. Modest dairy price falls unlikely to alarm markets

By Kymberly Martin

NZ swaps closed up 1-5 bps across the curve.

Overnight, US 10-year yields traded between 2.18% and 2.30%.

It was a fairly choppy day for NZ swap markets yesterday. Yields initially dipped on the release of 1Q PPI, which was weaker than expected, if largely dragged down by commodity prices.

Later in the day, yields pushed higher after the release of the RBNZ’s inflation expectations survey showed a tick-up. Formerly a little–watched series, it is enjoying its moment in the spotlight, after the Bank indicated in its last statement it is watching to see if “wage and price-setting outcomes settle at levels lower than is consistent with the inflation target”.

The 1.85% 2-year ahead reading would appear to have stabilised just a sliver below the ideal 2.0% mid-point. It is not caving in to the 1.0% inflation (expectations) level the RBNZ has run as a rate-cut scenario.

And if we can believe our CPI forecasts – along with the Reserve Bank’s supposition that inflation expectations show signs of responding to actual inflation – then we suspect these inflation expectations will probably trend higher, not lower, over coming quarters.

Certainly we believe the market’s pricing (around 40% chance) of a rate cut as early as the June 11 meeting is misplaced. A strong case for cuts has not yet been made, in our view.

However, this pricing has eased back from around 50% in recent days. NZ 2-year swap also closed up 1 bps, at 3.37%. The 2-10s curve has re-steepened to 61 bps.

The overnight GDT dairy auction showed another modest fall (-2.2%). This is unlikely to alarm the rates market this morning but will disappoint those looking for the slow bleed lower in prices to stop. We continue to expect prices to remain subdued over coming months with some rebound later in the year.

Overnight the bond roller-coaster continued. US 10-year yields popped higher after the release of stronger than expected April housing starts. Yields briefly poked their nose above 2.30% before subsiding to 2.25% currently.

Tonight it is all about Minutes. The US FOMC releases its 28-29 April Minutes while the Bank of England also releases its latest set.

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Kymberly Martin is on the BNZ Research team. All its research is available here.

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1 Comments

with oil around 60 and our dollar dropped against the USD, the deflationary has now disappeared, it gave a short sharp boost to consumer spending but that too will now decline as there is little wage growth but other expenses increase

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