RBA may cut rates after today's review. Markets see a June NZ cut too. Markets see US 10yr benchmark rising above 2% later in year

By Kymberly Martin

It was a reasonably quiet day in the NZ market after the dramas earlier in the week. NZ swaps closed up around 1 bps while NZGB yields closed down 1-2 bps.

The market continues to prices further rate cuts from the RBNZ. It prices a 1.92% trough in the OCR within the year ahead. It assigns about a 55% probability to a cut at the RBNZ’s next meeting in June. This seems reasonably fair to us.

Ahead of tomorrow’s RBA meeting, the market assigns around a 50% chance of a cut. The market ultimately sees the RBA’s cash rate being cut to 1.63% within the year ahead, from its current level of 2.0%.

Our NAB colleagues believe last week’s low-side CPI reading offers the RBA the opportunity to add more support to the domestic economy, without risk to its inflation target. They see a cut tomorrow as likely, even though the economy continues to reveal resilience in the face of the resources sector downturn.

On Friday night, US 10-year yields pushed a bit higher into US early morning data releases. However, core inflation outcomes (ECI, PCE deflator) were close to expectations. Yields drifted lower into the close.

US 10-year yields ended the week at 1.83%, close to the middle of the 1.70-2.00% range that currently contains them.

Ultimately, as we move through 2H we see yields breaking out of the top of this range (as the Fed delivers further rate hikes). Near-term however, the bottom of the range may well be revisited.

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