Poor US jobs report changes the yield landscape, compounded by poor US factory orders. Eyes now on RBA rate decision and QSBO

By Kymberly Martin

NZ swap and bond yields closed little changed on Friday. 

On Friday night, US 10-year yields dipped after a disappointing payrolls report, ending the week at 1.99%.

It was a relatively quiet day in the NZ market on Friday. There was an absence of key domestic data releases and the market was somewhat in limbo ahead of the US payrolls reporton Friday night.

NZ 2-year swap ended the week at 2.70%. The market priced around a 2.45% trough in the OCR by mid next year, from its current level of 2.75%. Across the Tasman the market also continues to expect rate cuts from the RBA. Almost 40 bps of cuts are expected by Q3 next year, from the RBA’s current cash rate level of 2.00%.

On Friday night, offshore yields traded a tight sideways range ahead of the release of the US payrolls report. The report was disappointing in its headline and its detail.

An October Fed hike how appears well off the cards, and even our core view of a hike in Dec appears shaky. Fed fund futures now price just a 0.18% FFR by year-end from its current level mid the 0-0.25% range. Only a 0.58% FFR is priced by the end of next year.

On the release, US yields gapped lower across the curve. US 10-year yields quickly found themselves at 1.94% from 2.05%. Yields then traded down to intra-night lows near 1.90% (equivalent to the late-Aug gap lower) as US factory orders also disappointed expectations. Later US 10-year yields clawed their way back up to end the week at 1.99%.

The move was mimicked by AU bond futures on Friday night/Sat morning. We anticipate NZ yields will open lower today, with a flatter curve. Otherwise it’s a relatively quiet start to the local week. This week’s highlights are scheduled for tomorrow in the form of the RBA’s meeting and the release of the Q3 NZIER business survey.

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