NZ swap and bond yields closed down 1-5bps yesterday. Overnight, US 10-year yields pushed up from 2.15% to 2.19%.
NZ yields drifted lower from the open following the ISM-inspired moved in US yields. Short-dated swaps only nudged 1bps lower, as the market remains reticent to price much more than a 50% chance of a RBNZ rate cut on 10 December. However, 10-year swap fell 4bps, taking the 2-10s curve down to 79bps.
Yields on NZGBs also declined across the curve by 3-5bps, marginally widening swap-bond spreads.
The yield on NZGB 27s now sits at 3.51%. We anticipate higher yields by year-end on the assumption that the US Fed does finally hike rates, and US 10-year yields push well back into the upper-half of their 2-2.50% range.
However, in this scenario, we see NZGBs outperforming USTs i.e. NZGB-UST27s spreads should narrow. We continue to broadly see a 90-130bps range for this spread.
Overnight, US 10-year yields pushed off their lows after a stronger than expected US ADP employment report. The market looks to this data for a steer on Friday’s all-important payrolls report, regardless of misgivings about the correlation between the two series. From 2.15%, US 10-year yields now trade at 2.19%. We believe yields remain vulnerable to another sharp leg higher on a solid payrolls report on Friday.
In the early hours of this morning, Fed Chair Yellen, has also attempted to keep a 17 December rate hike front of mind. She has made it clear the Fed is keen get started on policy normalisation, even if the pace will be very slow. She worries that to delay would lead to abrupt tightening that could inadvertently push the economy into recession. The market is back to pricing almost a 75% chance of a hike this month.
Kymberly Martin is on the BNZ Research team. All its research is available here.
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In the early hours of this morning, Fed Chair Yellen, has also attempted to keep a 17 December rate hike front of mind. She has made it clear the Fed is keen get started on policy normalisation, even if the pace will be very slow. She worries that to delay would lead to abrupt tightening that could inadvertently push the economy into recession.
OECD beat her to it.
Global growth prospects have clouded this year. Global growth has eased to around 3%, well below its long-run average. This largely reflects further weakness in emerging market economies (EMEs). Deep recessions have emerged in Brazil and Russia, whilst the ongoing slowdown in China and the associated weakness of commodity prices has hit activity in key trading partners and commodity exporting economies, and increased financial market uncertainty.
Global trade growth has slowed markedly, especially in the EMEs, and financial conditions have become less supportive in most economies.
Growth would also be hit in the euro area, as well as Japan, where the short-run impact of past stimulus has proved weaker than anticipated and uncertainty remains about future policy choices.
There are increasing signs that the anticipated path of potential output may fail to materialise in many economies, requiring a reassessment of monetary and fiscal policy strategies. Read more
I suggest the global wholesale debt build has long since passed.
These prices look nothing like the economic and financial conditions that demand the FOMC end ZIRP (not that ZIRP would do anything positive to begin with) lest this and the global economy overheat. Monetary practitioners are always finding themselves worried about being “behind the curve” in terms of inflation, and thus they only grow impatient and more so after each deliberative delay. What we see here is that there is no such curve for the FOMC to be behind, as nothing they suggest is even remotely priced on any front. Read more
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