Slump in business confidence points to soft Q3 growth. Disinflation fears ease as oil jumps. Attention now turns to GDT auction

By Raiko Shareef

Short-end NZ interest rates edged lower after a measure of NZ business confidence slumped, while global interest rates rose as the oil price rally assuages disinflation concerns

The ANZ survey’s headline business confidence measure fell to -29.1 in August, the lowest level since 2009.

We pay close attention to the ‘own activity’ measure, which provides a gauge on GDP growth. Yesterday’s reading of 12.2 is consistent with our forecast that GDP will fall below 2% in 2016.

Worryingly, if the survey deteriorates further, then our forecasts would start looking rather optimistic.

The NZ rates market took on board the message that the slowing pace of NZ data firms up the prospect of further near-term RBNZ rate cuts. The 2-year swap yield declined 2 bps to 2.78%. We forecasts two further 25 bps rate cuts from the RBNZ by October, which could see the 2-year swap trade down toward 2.70%.

Offshore, global bond markets softened, as sharp gains in oil prices eased concerns about further disinflation. The price of WTI crude gained 7.7%. The 27% rally over the past three days has been the sharpest gain since Iraq invaded Kuwait in 1990. Last night’s gains were supported by OPEC announcing that it’s ready to talk with other producers to achieve “fair prices”. In addition, US authorities lowered their estimates of crude output.

The US 10-year bond yield is up 3 bps to 2.21%.

Today, the RBA’s statement will be closely parsed for signs that it is leaning toward easing, in light of China’s recent wobbles. The final reading of China’s Caixin PMI for August will also be watched.

Overnight, the dairy auction will help set the tone for NZ rates tomorrow.

Raiko Shareef is on the BNZ Research team. All its research is available here.