As markets eye the US non-farm payrolls report, yields fall despite good ADP data. ECB holds rates, revises data slightly higher

By Kymberly Martin

NZ swaps closed down 1-5 bps yesterday, with a flatter curve.

Overnight, US 10-year yields slipped from 1.84% to 1.80%.

In the absence of domestic data releases yesterday, NZ swaps declined along with a drift lower in US and AU yields. NZ 10-year swap closed down 5 bps at 2.89%.

The May historic lows sit a little lower around 2.80%. As the short-end of the curve was better anchored, this move has taken the 2-10s swap curve back down to 60 bps.

Ahead of next Thursday’s RBNZ meeting the market still prices little chance of a cut. Slightly less than a 25% chance is priced, although the market still prices a full cut within the year ahead. This would take the OCR to 2.0%.

Overnight the ECB left its interest rate and quantitative easing program unchanged. President Draghi emphasised the Bank is focusing on implementing previously announced measures, including the corporate bond buying program that kicks off on 8 June. The ECB provided further detail on the pending program. It will not be necessary for the ECB to sell corporate bonds it buys, even if they are subsequently downgraded to ‘junk’ status.

The ECB’s published forecasts for CPI were revised slightly higher for 2016 (reflecting higher oil prices) but left unchanged for 2017/2018. After the announcements German yields traded lower. From 0.15%, German 10-year yields now sit at 0.11%.

US yields also followed the move lower. An ‘in-line’ US ADP employment report briefly caused yields to spike higher. But that proved short-lived. As we look toward tonight’s US payrolls report, US 10-year yields trade at 1.80%. The overnight moves, should place further downward pressure on the long-end of the NZ curve this morning.

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