By Kymberly Martin
NZ swaps closed up 1-3 bps on Friday.
On Friday night, US yields closed lower across the curve.
NZ 2 and 10-year swap ended the week at 2.26% and 2.98% respectively, a little higher on the week. The market looks for about 37 bps of further RBNZ rate cuts within the year ahead. However, it still assigns limited probability to a cut at the next meeting on 28 April. It prices about a 33% chance, with a 25 bps cut not fully priced until the August meeting.
We doubt the Bank will delay that long. As long as the NZ TWI hangs on near the top of its year-to-date range, it will depress the RBNZ’s medium-term CPI projections. The Bank will also be aware that the March OCR cut was not all passed through to borrowing rates. Given the RBNZ has indicated at least one more OCR cut is to come it may see little point in delay. Formally we forecast a further 25bps of cuts at the April and June meetings, taking the OCR to a cyclical trough of 1.75%.
On Friday evening, there were a handful of US data releases. US yields showed their most notable response to the dip in US April consumer sentiment, shown in the University of Michigan survey. From evening highs around 1.79%, US 10-year yields ended the week at 1.75%.
After very protracted talks in Doha over the weekend, headlines confirmed early this morning that oil producers had been unable to come to any agreements. Expect to see a drop in the oil price today which will likely be reflected in downward pressure in yields offshore and domestically.
The domestic focus today will be the release of Q1 CPI. Our expectation for a 0.1% q/q (0.3%y/y) release is slightly below consensus and the RBNZ’s published expectations. We anticipate the market will be more sensitive to a low-side reading, given how far CPI already sits from the RBNZ’s 2% mid target. If delivered, the market will likely increase its pricing for an April/June rate cut.
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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