Expectations of RBNZ rate cut evenly split; US 10-year treasury yields follow oil price lower; expectation for NZ yield curve to flatten on overnight movements

By Kymberly Martin

NZ short-end swaps dipped yesterday ahead of Thursday’s RBNZ meeting. Overnight, US 10-year yields traded down to 2.22%.

Ahead of Thursday’s RBNZ meeting, the market is pricing a 50/50 chance of a cut, clearly illustrating the divergent forces at play.

We come down on the side of expecting the Bank will cut. Inflation and inflation expectations remain below target, prospects for the dairy sector remain fragile and the NZTWI, at 72.1, now sits around 6% above where the RBNZ had projected it would average this quarter.

The NZD’s bounce after the solid US payrolls report on Friday, also suggests the RBNZ can be less confident that Fed hikes can do the required work to lower the NZD.

Overnight, in the absence of key data releases, US 10-year yields followed the global oil prices lower. The WTI price has plunged almost 5%, returning to its lows for the year below US$40/barrel. From 2.29% in the early hours of this morning, US 10-year yields now trade at 2.22%.

Domestically today, the Q3 manufacturing activity index will be released. However, we expect the market will largely be looking forward to Thursday’s RBNZ meeting. The long-end of the NZ curve will take its cue from moves offshore overnight, resulting in a flatter curve.

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