By Kymberly Martin
There was a modest rise in NZ swap and bond yields yesterday, following the cue from offshore.
Overnight, US yields failed to push higher. Instead, US 10-year yields consolidated between 1.76% and 1.79%.
NZ yields pushed a little higher from the open yesterday, with NZ 2-year swap closing at 2.25%. The market has slightly reduced its expectation for RBNZ rate cuts in the year ahead. It now prices a trough in the OCR around 1.89% i.e. 36 bps below current.
Yesterday’s, food price release for March (+0.5%) was a bit higher than we had expected but not quite enough to push up our estimate for Monday’s Q1 CPI release. We finalise that at +0.1% q/q or +0.3% y/y. There is now a little more upside risk to our forecast than downside. But this does not translate into more upside risk to the RBNZ’s near term inflation view. The Bank forecast +0.4% y/y for Q1 CPI inflation in its March MPS.
A positive day for Asian equity markets (which was likely helped by China trade data not producing any nasty surprises) was followed by a very strong night for European equity markets and credit spreads. As European equities galloped higher, however, German bond yields moved in the opposite direction. From evening highs above 0.17%, German 10-year yields now trade below 0.13%. Meanwhile US equivalents have also slipped from intra-night highs above 1.79% to 1.76% currently.
There was no change to the Bank of Canada’s cash rate overnight, as expected. While it raised its GDP forecast for 2016 (1.7% from 1.4%) it cut its 2017 forecast (2.3% from 2.4%). The Bank noted that positive economic forces are starting to outweigh the negatives. But it does expect deeper cuts in energy sector investment than it had forecast in January.
Today we have the NZ manufacturing PMI to look out for but the local highlight will be the release of the AU employment report this afternoon. Our NAB colleagues have warned of the potential for a very strong employment print, partly attributable to data sampling issues. Ahead of this the market currently prices around 25 bps of RBA cuts within the year ahead.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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