NZGB yields have fallen 139 bps so far this year, with more to come. More official rate cuts coming "as inflation matters". 2 yr swap rates sink towards 2%

By Jason Wong

Soft US GDP data led to a rally in US Treasuries on Friday. The 10-year rate closed down 5 bps at 1.45%.

Sluggish US GDP growth, averaging just 1% over the past few quarters, and core PCE inflation running at 1.7% provide no reason for the FOMC to step up its rhetoric on policy tightening.  A few basis points was sliced off the Fed funds futures curve so only 10bps of tightening is now priced in by year-end.

Lower US rates fed through to European markets, with Germany’s 10-year rate down 3 bps to minus 0.12% and the UK 10-year rate falling 3 bps to a record low of 0.68%.  Japan’s 10-year rate spiked up 9 bps to minus 0.20%, its highest level in over a month, following the lack of action from the Bank of Japan.

NZ rates continue to probe historical lows and after the weak US report we should see further falls in yields on the open. NZ’s 10-year government bond rate closed down 3.5 bps to 2.19% a record low.  The yield is now down a remarkable 139 bps for the year to date and it looks like there’s more to come.

NZ’s 2-year swap rate fell by 1.5 bps to 2.04%, a record low.  OIS pricing for the August meeting was unchanged at 2.01%.  Strong building consents data and robust levels of business confidence are not seen to be barriers to further NZ rate cuts.  It is inflation that matters and the ANZ survey continued to show soft pricing indicators.  We now see CPI inflation threatening to push below the 0% mark soon.  This imparts a downward bias to future inflation expectations and the appreciating NZD adds to the downside potential for future inflation as well.

Coming Up

After Friday’s data deluge, there’s plenty more on the calendar over the next 24 hours.  First up, Fonterra will provide milk price and earnings guidance.  We don’t think that market movements to date have been enough to cause a revision to Fonterra’s milk price forecast, but if there is a change it is more likely to be down than up.  There will be some interest in the dividend forecast for the year.

On the international data, there’s a deluge of China PMI data, the Fed’s Dudley speaks, one of the few FOMC members we take particular note of, and US ISM manufacturing data provides the opportunity for some market reaction.