By Kymberly Martin
It was a reasonably quiet start to the Easter-shortened week in the NZ market. NZ swaps closed up 1-2 bps across the curve.
Tomorrow will bring the only domestic data release with real potential to impact the NZ short-end this week, the ANZ business survey. The headline number will remain a tug of war between strength in the services sector and the negative income impact from the dairy sector.
However, it may be the survey’s one-year-ahead inflation expectations series that gains most attention. Inflation expectations are the RBNZ’s current fixation, and this is one of the measures it tracks closely.
A further fall could encourage the market in its rate cut expectations. It currently prices that the OCR will be cut to around 1.90% within the coming 12 months. This is a fair representation of current risks.
Yesterday, the NZDMO announced the syndicate for launch of its new nominal NZGB 2025. It plans to issue NZD1-2 bln, subject to market conditions. This will plug the gap between the existing NZGB 2023 and NZGB 2027. Currently these bonds yield 2.63% and 3.04% respectively.
In a speech early this morning, US Fed Chair, Yellen extended her recent dovish tone. She reiterated that it was appropriate to “proceed cautiously” in raising rates. She also seemed less certain about prospective inflationary pressures saying the inflation outlook had become more “uncertain”. She highlighted two key risks, being slowing growth in China and further declines in commodity prices, particularly oil.
After her speech, equities burst higher and US bond yields fell, as the market has modestly reduced expectations for future rate hikes. The market now prices only a 66% chance of a further 25 bps Fed rate hike by year-end. US 2-year yields now trade at 0.81%, from highs of 1.0% mid last month. US 10-year yields have declined form early evening highs above 1.89% to 1.84% currently.
Tonight, the US ADP employment will no doubt colour the market’s expectations, as it awaits the all-important US payrolls report on Friday.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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