By Kymberly Martin
NZ swap and bond yields reversed much of the previous day’s gains yesterday.
Overnight, US 10-year yields traded up from 1.76% to 1.78% currently.
NZ yields showed little response to the release of the NZ manufacturing PMI yesterday morning that slipped a fraction, but implied the sector remains well in expansion. But yields across the curve appeared to take their cue from the earlier drift lower in US yields. NZ 2-year swap closed down 3 bps, at 2.23%.
There was slightly more excitement across the Tasman, after a stronger than expected AU employment report. Our NAB colleagues believe it is clear the labour market has improved over the past year, with the unemployment rate a full 0.5% points lower. Annual employment growth is also solid at 2.0%, the economy generating on average 20k jobs a month. Moreover, a similar pace of job creation is suggested by forward indicators.
RBA Governor Stevens has previously described recent labour market data as being “ambiguous”. We suspect yesterday’s data should resolve that ambiguity with the unemployment rate tracking back on, or a little below, the RBA’s February forecasts. The RBA has explicitly linked the case for further easing to the employment data. With the labour market continuing the improvement seen in 2015, and with inflation expectations well anchored, NAB continues to see the RBA on hold in 2016.
The market now prices only around an 85% chance of a 25 bps cut within the year ahead. i.e. a low in the RBA’s cash rate around 1.79%. The market prices that the RBNZ’s cash rate will be cut to 1.88%. Our central forecasts now see the RBNZ cutting its OCR at the April and June meetings, taking the cash rate to a cyclical trough of 1.75%. The possibility that the RBNZ’s cash rate falls below the RBA’s is quite real. Consistent with this view we see the probability that NZ-AU 2-year swap spreads trade into negative territory as the year progresses.
Overnight, US yields briefly dipped after the release of a lower than expected March US CPI release. However, overall, US 10-year yields are a little higher than last evening, trading at 1.78% this morning.
Daily swap rates
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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