Local rates rose yesterday on the back of a strong dairy auction, combined with the previous night’s sell-off in global bonds.
US rates remained relatively steady overnight.
The long-end of the NZ curve led rates higher, partially reflecting the 10 bp sell-off in the US 10-year on Tuesday. The local 10-year swap yield traded as much as 8 bps higher, before paring those gains to close up 3 bps at 3.63%.
The front-end lifted to reflect the slight lengthening of RBNZ rate cut odds, after dairy prices rose by nearly 17% at auction. We upgraded our estimate of Fonterra’s 2015/16 milk payout from $3.80/kgMS to $5.00/kgMS. We’d not get too carried away just yet, given that even a $5.00 payout would still be below the cost of production for many farmers.
But with dairy prices now well above what the RBNZ assumed when it constructed its September MPS forecasts, the market pared some of the easing that is priced in. We still look for another 25 bp cut in October, but are becoming less convinced on timing.
Trading in the US bond market was relatively quiet overnight, with yields drifting less than 1 bp higher at the longer-end. The short-end was hobbled by a subdued US inflation report.
NZ’s Q2 GDP report will be the highlight for our session, ahead of the Fed decision at 6am tomorrow morning.
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Raiko Shareef is on the BNZ Research team. All its research is available here.
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