By Kymberly Martin
The NZ swap curve steepened yesterday as short-end yields declined. Overnight, US 10-year yields traded sideways in a 1.75%-1.79% range.
Yesterday’s NZ Q4 retails sales data passed with without too much response from the market. However, it was the release of the RBNZ’s inflation expectations survey that jolted markets into action. The 2-year-ahead reading fell from 1.85% to 1.63% in Q1, continuing a downtrend of recent years. When considering the RBNZ’s future policy actions, this trend is more meaningful than the fact that headline CPI inflation itself is running low.
RBNZ Governor Wheeler noted in his early February speech, “With the ongoing weakness in commodity prices, and particularly oil, it will take longer for headline inflation to reach the target range. On the other hand, annual core CPI inflation, at 1.6 percent, is well within the target range, and the Bank’s combined measures of annual inflation expectations, averaging 2 percent, are more encouraging in terms of consistency with the PTA. However, we would not wish to see inflation expectations become unstable and decline significantly.”
The RBNZ will need to judge what it deems “significant”, but this reading certainly leans in this direction. Consequently the market slightly increased expectations for future OCR cuts, to 32bps, by year-end. NZ 2-year swap closed down 3 bps, at 2.54%. We continue to see potential for NZ 2-year swap to trade down toward its mid-2012 lows, close to 2.35%, in coming weeks/months.
Overnight, in reasonably calm markets, US 10-year yields traded a fairly tight sideways range, currently trading at the upper-end of the range, at 1.78%.
Today the NZ Local Government Funding Agency (LGFA) will hold its first tender since December. Spreads to NZGBs have widened notably since last tender, improving relative value. Outright yields are also attractive in a world of negative bond yields. However, in the current environment of limited appetite for credit risk, the bonds may have to work harder to attract buyers. A solid tender with some ‘tails’ may be the result.
Tonight’s US Fed Minutes are unlikely to be a major market mover. These are likely seen as somewhat obsolete, given subsequent significant market moves and release of US payrolls data that will play into current Fed thinking. Fed fund futures currently price around 30 bps of Fed hikes over the next two years.
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