Markets have no idea what the RBNZ will do tomorrow. Markets discount any chance of a US Fed hike in June

By Jason Wong

Yesterday, after the long weekend, the local rates market caught up with offshore moves during previous sessions and that meant a bias for rates to fall.

The bond curve showed falls of circa 3-4 bps. The 2-year swap rate fell by 5 bps to 2.24% while the 10-year swap rate fell by 2 bps to 2.83%.

Some traders thought that with the Fed out of the picture in June and the stronger NZD, the risk of the RBNZ cutting rates tomorrow had increased.  The OIS market prices tomorrow’s meeting at a 37% chance of a 25 bps cut.

Most see the rate decision as a close call, given recent misfiring communications from the RBNZ and a lack of confidence in what is driving the Bank’s decisions at the moment.

Certainly, the hawkish speech by the Governor in February, followed by the surprise rate cut in March and then the hawkish April OCR review means that anything is possible tomorrow.  We err towards a no-cut decision and the Bank maintaining an easing bias.

Overnight, there has been a downward bias to global rates.  Germany’s 10-year rate closed at a record low, down 4bps to just below the 0.05% mark. The US 10-year Treasury rate is down 3bps to 1.71%.

Year to date there has been some support around the 1.70% level so it will be interesting to see if rates can sustainably fall below this mark.  There are few catalysts this week to take them much lower from current levels.

The US OIS market shows little chance of the Fed tightening in June or July, just 1bp and 5bps priced in respectively.  By November, some 13 bps of tightening is priced in, so let’s call it a 50/50 chance of a hike late in the year.

Australian rates sold off after the RBA’s more hawkish tone than expected.  Overnight the 10-year bond future has recovered its losses compared to pre-RBA levels, while the 3-year rate is still about 4bps higher in yield.