Markets see reduced chance of more NZ OCR cuts this year. Business survey shows "improving economic momentum". But wholesale money costs stay low

By Jason Wong

US Treasuries have traded in a tight range and they show little change overall, despite a number of economic releases and the risk-off tone. The 10-year rate is flat at 1.56%.

ADP employment rose by 175k, in line with expectations. This won’t see any change to the consensus pick of 180k for non-farm payrolls on Friday night. It will take a stronger than expected figure to change current expectations of about a 1 in 3 chance of the Fed tightening again as soon as September.

A number of Fed speakers overnight had little market impact. Alternate voter Evans, a known dove, said there’s good reason to believe “we are in a protracted period of low equilibrium real interest rates,” and that a “lower-for-longer” rate scenario is taking deeper hold among businesses and investors.  Given this, any rate hike may simply just flatten the yield curve, rather than lead to substantially higher long-term rates.  We have some sympathy with this view.  Rosengren, a voter this year, suggested that keeping rates low for too long would raise financial stability concerns.

In the local rates market, the mood to price out any chance of a September RBNZ rate cut continued.  Less than 3 bps is now priced in, compared to 8 bps a few weeks ago.

Similar forces see the November meeting priced for 19 bps of cuts, the least amount since the last Monetary Policy Statement.  While the ANZ business outlook survey showed a 5 bps fall in year-ahead inflation expectations to 1.44%, the activity indicators on a seasonally adjusted basis suggested improving economic momentum at a good clip.

The swap curve showed 1-1.5 bp increases across the curve, while government bond yields were generally lower by a basis point.  Little movement in local rates is expected today.