Pressures on NZ yields appear all one way - down. Oil lower, US earnings lower, dairy prices lower, US benchmark yields lower

By Kymberly Martin

NZ yields pushed higher across the curve yesterday. Expect some payback today, after the RBA’s rate cut late yesterday afternoon.

Also overnight, US yield have traded lower, with US 10-year now back at 1.79%.

Yields pushed higher across both NZ swap and bond curves yesterday. NZ 2-year swap closed for the day at 2.32%, its highest level since early-March. Previously we have highlighted that 2-year swap above 2.30% would represent an attractive level to receive. This view is only strengthened by the RBA’s cut yesterday. We believe the market will now increase pricing of a June RBNZ cut and further cuts thereafter. Our central case remains a cut in June with the possibility of a further cut in August.

The RBA yesterday demonstrated it remains a committed inflation targeter, following last week’s low-side Q1 CPI print. It reduced the cash rate to a record low, of 1.75%, to improve prospects for sustainable growth in the economy and for inflation to return to target over time.

Although the RBA’s statement gave no indication of a further easing bias, it likely still exists and could be acted upon should inflation continue to undershoot. In that context the next live meeting is probably August. Should the non-mining recovery show signs of fragility the RBA would not hesitate to cut again. For the foreseeable future, however, our NAB colleagues expect the RBA to remain on hold at 1.75%.

Overnight, equities have fallen, led by commodity companies, as the WTI oil price has fallen a further 2.5%. With the S&P500 reporting season now well advanced (353/500 companies have reported), earnings growth stands at -9%. Companies may still be meeting/beating depressed earnings expectations, but overall, earnings are likely beyond their cyclical peak. In this more sombre background, ‘safe haven’ bonds found favour. US 10-year yields have traded down from 1.86% to 1.79%. German equivalents declined from 0.27% to 0.20%.

Finally, in the early hours of this morning, the latest GDT dairy auction showed average prices declined 1.4% since the last fortnightly event. This will disappoint those hopeful of a further modest rebound in prices.

Overall, the pressures on NZ yields at the open today appear all one way. Down. It will then be all eyes on this morning’s Q1 NZ employment report. Tonight, the US ADP employment report will likely be looked to, to gauge risks around Friday’s US payrolls report.

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