Market reaction expected no matter which way the RBNZ goes this morning. Focus then furns to BofJ decisions

By Jason Wong

The US 10-year Treasury rate drifted lower ahead of the FOMC announcement.  With nothing in the Statement to change views about the policy outlook, that trend continued post-FOMC, with rates nudging another couple of basis points lower in the aftermath.

As I write the 10-year rate is down 7 bps to 1.86%, unwinding some of the increase over the prior seven days.

The initial reading of the FOMC statement was to take rates higher as some interpreted the headlines as more hawkish, but overall the statement seems well balanced when compared against the previous statement.  Fed fund futures are barely changed, just one bp here and there across the latter part of the curve.  Slightly less than one full 25bps hike is priced in by December.

In Australia, the much weaker than expected CPI figures for Q1 led to a re-pricing of RBA cash rate expectations, with the odds for a 25 bps cut in May increasing from 14% to 50%, according to interbank cash rate futures.  A number of trading banks, including NAB, changed their call to a 25 bps easing next week.  Those interbank cash rates trade as low as 1.67% towards the end of the year, suggesting that the market is toying with 2 more possible RBA rate cuts this year.  This puts the pressure on the RBNZ to deliver further rate cuts, otherwise yesterday’s NZD/AUD appreciation will gain further traction.

The Australian 2-year swap rate fell by a massive 19 bps to 2.02%.  Lower Australian rates imparted a downside bias to NZ rates, with NZ’s 2-year swap rate down 2 bps to 2.215%.  It was only at the end of last week that the NZ-Australia 2-year swap spread had finally gone negative, but that proved to be ephemeral.  NZ’s 10-year swap rate fell by 3 bps to 3.01%.

Coming Up

There’s a number of key market risk events over the next 24 hours, beginning with the RBNZ’s OCR review at 9am.  As we outlined yesterday, mis-firing RBNZ communications mean that the policy of a cut or on-hold decision could easily go either way, with BNZ tipping an out-of-consensus 25 bps cut.  Some sort of market reaction is guaranteed either way.

Japan CPI and industrial production data precede the BoJ’s policy decision later in the afternoon.  Expectations are split, with some calling for various forms of further easing, while others suggest the bank will delay any further stimulus measures until the June or July meetings.  In our view the BoJ needs to deliver some fresh stimulus measures to avoid an undesirable strengthening of the yen.

Overnight, US Q1 GDP data will be soft, the only question being one of degree.  A weak outcome could be the result of errant seasonal adjustment issues, but timelier indicators have yet to portend a decent recovery in Q2.