Markets have jitters over China stumbles, wonders if enough to delay Fed hike. RBA warns on house price risks

By Kymberly Martin

The NZ curve flattened yesterday, following offshore moves.

US short-end yields trade somewhat lower this morning.

NZ swaps and bond yields traded lower yesterday on the back of offshore moves, in the absence of domestic data releases. NZ 2-year swap closed down 3 bps, at 2.84%, having touched intra-day lows of 2.83%, their lowest level since May 2013. We continue to see 2-year swap trading down to 2.70% in the months ahead as the RBNZ cuts the OCR to 2.50% by its October meeting. This is ahead of market pricing that sits at around 2.68% for Oct.

The NZ swap curve flattened as 10-year swap closed down 8 bps, at 3.58%. The 2-10s curve now sits at 74 bps, at the lower-end of the 70-125 bps range we see through to year-end. However, if we are not to break lower near-term, we will need to see US 10-year yields stabilise after their recent sharp falls.

Yesterday afternoon, US 10-year yields gapped lower, as the USD/CNY opened another 1.4% higher, in line with the PBOC’s newly stated policy objectives.  However, from early evening lows below 2.05%, US 10-year yields have climbed higher to sit at 2.13% this morning.

However, the impact on short-end US yields has been more enduring. US 2-year yields sit around 3 bps lower at 0.64%. Fed fund futures for Dec 15 now sit just above 0.30%, from above 0.34% a week ago. The market questions whether current market jitters might be sufficient to delay the first Fed hike.

Last evening RBA’s Deputy Governor, in his speech, stated that lower interest rates were helping the AU economy transition. However, he also highlighted the risks associated with ever-rising house prices. These comments will no doubt strike a chord with counterparts across the Tasman.

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