US yields push higher on Fed positions, but local swaps can't hold their yield gains after RBNZ review

By Kymberly Martin

NZ swap and bond yields closed little changed yesterday despite the double-whammy of the US Fed and RBNZ announcements.

Overnight, US yields pushed higher.

Following close on the heels of the US FOMC announcement yesterday morning, the RBNZ left its cash rate unchanged at 2.75%. It believes it is appropriate to now “watch and wait” after three consecutive rate cuts. However, its statement maintained that “some further easing in the OCR seems likely”, depending on emerging data.

The RBNZ will also be watching the currency. It noted the rebound in the NZD since Sept. If sustained, the Bank said it could dampen tradables sector activity and medium-term inflation. Therefore, all else equal, a higher currency could require a lower path for the OCR. The NZ TWI, at 72.40, remains 7% above the RBNZ’s projected average for Q4, as per its Sept MPS.

Our central case remains a further 0.25% cut from the RBNZ, taking the OCR to a cyclical trough of 2.50% by year-end. Risks around this view appear fairly equally balanced.

We continue to see the RBNZ as a ‘reluctant cutter’ given its ongoing (and well-founded, in our view) concern about the Auckland housing market. But we see it as likely the Bank keeps the OCR at its 2.50% low for a prolonged period. We see it as unlikely the RBNZ will raise the OCR again before 2017. By this time, both we and the RBNZ see CPI inflation having picked up to well within the Bank’s target range.

Yesterday morning, NZ swaps pushed higher across the curve in response to the more hawkish Fed statement and the ‘no cut’ result from the RBNZ. However, in the afternoon the move reversed, with 10-year swap closing virtually unchanged at 3.47%. NZ 2-year swap closed 1 bps higher at 2.73%. The market continues to price a trough in the OCR around 2.47% by mid next year.

Overnight, US data showed GDP growth had slowed significantly in Q3, as expected. However, this was not sufficient to prevent a further sell-off in US Treasuries. As the market has moved to price a 50% chance of a US Fed hike by year-end, US 10-year yields have traded up from 2.09% to 2.16%, ignoring a weak US pending home sales number.

Tonight, all eyes will be on the release of the US PCE deflator (the Fed’s preferred inflation measure), which may help inform the market’s thinking on what to expect from the Fed.

The Fed’s statement yesterday appears to have shifted the market’s focus. 

The onus now appears to be on data/financial markets to get worse/surprise negatively, to prevent the Fed hiking at its Dec meeting, rather than needing to get a lot better in order to get it to pull the trigger.

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