Markets see little chance of a change in official benchmark interest rates this month in either the US or NZ, but higher chances at or after year end

By Kymberly Martin

NZ rates closed little changed in a quiet end to the week. Most of the action occurred after the release of US payrolls data on Friday night.

US 10-year yields ultimately closed a little higher.

NZ 2-year swap closed for the week at 2.00%, near the upper-end of its tight range of the past month. The market continues to prices little chance (12%) of an RBNZ rate cut later this month, but has fully priced a cut by February next year. It looks for a trough in the OCR just below 1.60% within the year ahead.

Friday night was all about the US labour market report. US Treasury yields initially plunged on the report but failed to sustain the move. It was swiftly retraced. US 2-year yields ultimately closed around pre-payrolls levels. US 10-year yields closed fractionally higher at 1.60%. This remains near the upper-end of their tight range of the past six weeks.

The most recent CFTC data shows speculative net long positions in US 10-year Treasuries increased to 101k from 48k. i.e. this segment of the market is positioned in anticipation of lower yields.

With regard to expectations for Fed activity, the OIS market has wound back pricing of a September rate hike to a 32% chance vs. pricing of 37% prior to the payrolls report. It continues to price a 75% chance of a 25 bps hike for December.

There is a handful of second tier NZ data this week which may simply add to information that domestic activity was fairly strong in Q2. Offshore factors may prove the dominant influence on NZ rates.

The RBA is not expected to change it rate setting at its meeting tomorrow but at the margin, any tweaking of language could influence NZ OIS pricing. The ECB’s meeting on Thursday could also set the tone for markets heading into the weekend.

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