NZ swap and bond yields closed down 1-2 bps yesterday.
Overnight, US 10-year yields peaked near 2.27% before trading back down to 2.24% currently.
In the absence of domestic data releases the market traded without much direction yesterday, ahead of the RBNZ’s meeting today.
We anticipate the Bank will cut its cash rate 25 bps, to a cyclical trough of 2.50%. We see a very high hurdle to further cuts.
By contrast, the market prices only around a 50% chance of a cut today, but a trough in the OCR around 2.38% in around a years’ time.
We expect that NZ short-end yields would dip on a cut today. However, the extent of the move will be dependent on the tone of the Bank’s accompanying statement, and how much it chooses to water down its easing bias. Regardless, we expect the market will remain inclined to price further cuts until well into next year.
Overnight, US yields pushed a little higher along with the S&P500. Both have reversed the move somewhat in the last couple of hours. From intra-night highs near 2.27%, US 10-year yields now trade at 2.24%, ahead of an auction of US 10-year Treasuries this morning.
With one week to go until the US FOMC meeting the market now prices an 80% chance of a Fed hike. With this meeting now well priced, a continued slump in commodity prices and a relatively accommodative ECB, it seems less likely the long-end of the US curve will show a strong reaction to a hike next week. In the near-term, support for US 10-year Treasuries will likely remain fairly strong when yields approach recent range highs, of 2.37%.
After today’s RBNZ meeting it will be all eyes on the AU employment report. Our NAB colleagues, and consensus, look for some payback in the November report, following the staggeringly strong results in October. An expected negative employment outcome and tick up in the unemployment rate to 6.0% (from 5.9%), could keep the market considering further RBA rate cuts. Ahead of this meeting, the market prices around 20bps of cuts by the end of next year.
Tonight the Bank of England will meet, though no change of policy is expected.
Kymberly Martin is on the BNZ Research team. All its research is available here.
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