By Kymberly Martin
The NZ swap and bond curve steepened on Friday.
US 10-year yields traded up toward 1.60% on Friday night but closed for the week at 1.55%.
NZ short-end yields consolidated on Friday, with 2-year swap closing little changed at 2.20%. The market prices almost a 70% of an RBNZ cut on 11 August.
Two key events have potential to influence pricing this week. Today’s Q2 CPI release and Thursday’s RBNZ intra-meeting update on its economic assessment. We are looking for a 0.6%y/y reading for headline CPI today, aligned with the RBNZ’s forecasts in the June MPS. We continue to look for a rate cut in August, taking the OCR to 2.0%.
On Friday, the rise in offshore yields was the most significant influence on the long-end of the NZ curve. NZ 10-year swap and bond yields both closed up 4bp. As NZ 10-year swap closed for the week at 2.60% it is now around 10 bps above its early-July lows. However, we would be wary of prematurely calling an end to the longer-term downtrend that has been in place since the start of 2014. This would need to be supported by a sustained rise in US long yields.
In this regard, US 10-year yields demonstrated the diverse forces that influence them on Friday night. They lurched higher after the release of stronger-than-expected US retail sales and annual core CPI data. 10-year yields had the 1.6% level in sight. However, in the early hours of Saturday morning a ‘safe haven’ bid returned to Treasuries after news broke of the (now failed) military coup in Turkey. US 10-year yields closed for the week at 1.55%.
CFTC data released on Friday showed that speculative positions in US 10-year Treasuries were at their longest since April 2013. i.e. speculators are positioned for lower yields. This suggests yields will be vulnerable to a further push higher if US data continues to surprise to the upside. Recall, in May 2013, US 10-year yields surged higher as the market began to anticipate the end of US QE.
German and UK yields also closed higher on Friday night. German 10-year yields closed in positive territory for the first time since the UK Referendum.
In the wake the Bank of England’s inaction on Thursday, chief economist Andy Haldane gave a speech on Friday, which outlined plans in fairly clear language; “Given the scale of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary… This monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August Inflation Report round.”
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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