US markets not pricing a Fed rate hike in 2016. Fed's Dudley cautious about growth prospects, still worried about long-term jobless

By Kymberly Martin

With little on the domestic agenda on Friday, the long-end of the NZ curve took its cue from offshore moves.NZ 10-year swap closed down 3 bps, at 2.92%, while NZGB 2033s closed down 5 bps, at 3.14%.

The short-end of the curve was better anchored. NZ 2-year swap closed down just 1 bps, at 2.18%.

The market now prices around 45 bps of further RBNZ rate cuts within the coming year, although assigning only a 40% chance to a cut in April.

On Friday night US 10-year yields traded a tight range, in the backdrop of modestly positive equity markets. Yields closed at 1.72% for the week, at the lower end of their range since February.

The most recent CFTC data showed an increase in speculative short positions in US 10-year Treasuries. At -117.3k, this is the largest short position since early November. i.e. the market is positioned on the expectation of higher yields.

At the short-end of the US curve the market now prices less than a 50% chance of a Fed rate hike by year-end. In a speech on Friday night the US FOMC Vice-Chair Dudley embellished his dovish credentials and firm alignment with Chair Yellen.

He highlighted that low inflation expectations are still a cause for concern (ditto the RBNZ). He reiterated “significant uncertainty” about growth prospects abroad, calling for a cautious, gradual approach to rate hikes. He said that subdued wage growth suggests there is still slack in US labour market. He sees the U.S. jobless rate falling to around 4.75% in 2016. Although he sees the labour market as healthy, long-term unemployment is still high.

He did however comment that recent USD weakness means “that problem is a little less”. It may therefore provide less of an impediment to further hikes(s) later in the year. Formally we look for two Fed hikes in H2.

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