Eyes on RBNZ update. Markets reluctant to price in more than one rate cut and even that is not fully priced. Aussie rate cut bets have less conviction

By Kymberly Martin

NZ swap and bond yields closed down 1-4 bps yesterday, with a ‘bull’ steepening of the curve.

Overnight, US 10-year yields again tested the 1.60% level.

Yesterday’s NZ PSI and CPI releases (0.4%y/y) re-illustrated an enduring theme. The NZ economy is strong but is struggling to create CPI inflation. Low tradable sector inflation remains a key part of the story. In turn this is not being helped by the resilient NZ TWI dampening import costs. In our view, this CPI data removes the final potential barrier to the RBNZ outlining these concerns at its intra-meeting update on Thursday.

Thursday’s RBNZ update on the economy has potential to nudge the market toward fully pricing an August cut. After yesterday’s CPI release the market now prices almost an 80% chance of a cut. However, we believe the market will remain reticent to price an OCR that is much below 1.75% (currently a 1.80% trough is priced). The RBNZ’s concerns for financial stability, emanating from the bubbling housing market, should prevent the market pricing aggressive cuts.

We therefore see NZ 2-year swap likely to find support below 2.10%. Broadly we still see a 2.10-2.40% range in the months ahead. Currently it sits at 2.16%. Meanwhile the NZ 2-10s curve has steepened up to 44bps. The primary influence on the long-end of the NZ curve remains moves in offshore yields.

Overnight, with limited data flow and fairly flat equity markets, US 10-year yields again attempted to break through the 1.6% level. However they have subsequently subsided to trade at 1.58% currently. German equivalents have also fallen back into negative territory.

Today, the RBA’s Minutes will be released. The market may be looking for extra colour around the Bank’s change in language in the final paragraph of its post meeting statement. But next Wednesday’s AU Q2 CPI print may have greater potential to impact market pricing. Ahead of this, the market prices a 60% chance of a 25 bps RBA rate cut in 2 August. 

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