NZ swap and bond yields closed up 1 bps across the curve yesterday.
Overnight, US 10-year yields traded from above 2.05%, down to 2.02%.
It was a quiet start to a shortened week in the NZ rates markets. There was little response to the only domestic data release yesterday, the NZ trade balance, which came in a bit below market expectation.
Ahead of Thursday’s RBNZ meeting the market continues to price less than a 20% chance of a cut this week, and around a 50% chance of a cut by year-end. If the RBNZ is to be consistent with previous indications, we would put the odds at higher than that. However, our central case sees the OCR unchanged at 2.50% (2.75% currently) throughout 2016. This will see the NZ cash rate differential with the US narrow, assuming the US Fed has finally raised rates by some point next year.
For now, NZ 2-year swap sits at 2.75%, with the 2-10s curve at 77 bps. We continue to prefer to position for steepening at the lower-end of the 60-120 bps range we anticipate for the months ahead.
Overnight, US yields drifted lower, assisted in the early hours of this morning by a smattering of US data releases that came in below expectation. Chief amongst these were softer durable goods orders and a consumer confidence reading that dropped back to a 3-month low. US 10-year yields have traded down to below 2.02%.
All eyes are now on the US FOMC meeting early tomorrow morning. Given the continued disappointing tone in US data, the Fed will need to be firm in its urgings that a hike before year-end is still a possibility, if we are to see US yields bounce from current levels.
Locally today, all eyes will be on the release of AU Q3 CPI. Historically this can be a big market mover, though our NAB colleagues see this release coming close to consensus and RBA expectation, at around 0.5%q/q for underlying inflation. This may limit any market response. Currently the market prices around 40 bps of further RBA rate cuts by mid next year. Our NAB colleagues see it as more likely the RBA remains ‘on hold’ with its cash rate at 2.00%.