The NZ curve closed a fraction flatter yesterday.
Early this morning, the US FOMC statement inspired volatility, with US 10-year yields now trading at 3.25%.
It was a relatively quiet day domestically as the market continues to price around 40 bps of cuts from the RBNZ in the year ahead. NZ 2-year swap closed little changed, at 3.17%. The 2-10s curve closed slightly lower at 84 bps.
After a period of consolidation we continue to see a steeper curve by year-end. We target a move above 100 bps.
Early this morning there was no smoking gun in the US FOMC statement. It was quite pedestrian in its discussion of moderate expansion in Q1. It stuck to the rule book saying it would be appropriate to raise the FFR when, “it has seen further improvement to the labour market and is reasonably confident that inflation will move back to its 2% objective over the medium term.”
This certainly did not sound like a Bank with any sense of urgency. We stick with our view of a first hike in Sept, though risks are tilted toward later.
US 10-year yields climbed steadily from 2.32% to 2.40% ahead of the announcement. In a bout of volatility that then ensued, yields gapped back below 2.32% before returning to 2.34% currently. Longer-dated yields are likely responding to the slight downward revision to the Fed’s “dot point” forecasts for the FFR for 2016 and 2017. However, end-2015 remains unchanged at 0.625%.
Expect a flatter NZ curve at the open today.
Then all eyes will be on the release of NZ Q1 GDP. Although we are aligned with consensus and the RBNZ in expecting 0.6%q/q, there is plenty of potential for an outlying result.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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