By Kymberly Martin
NZ swap and bond curves steepened yesterday, taking their cue from the previous night’s offshore moves.
Overnight, US yields have pushed a little higher across the curve.
It was a reasonably quiet start to the week in the NZ market in the absence of key domestic data releases and a public holiday in Australia. NZ 2-year swap closed up 2 bps, at 2.01%. The 2-10s curve steepened to 48 bps. Similar moves were seen in the NZGB curve.
The LGFA (Local Government Funding Agency) announced the details of its tender, scheduled for Wednesday afternoon. It will offer NZD 30m of LGFA 2021s, NZD 25m of 2023s, NZD 50m of 2025s and NZD15m of 2027s.
Overnight, an array of European and US PMI data confirmed manufacturing activity remains in expansion across the region. Otherwise markets were reasonably quiet. US yields pushed a little higher across the curve, taking 10-year yields up to 1.62%, from 1.59%. The market is not yet convinced the US Fed will hike by year-end. However, it prices around 17 bps of hikes for the December meeting.
We see the Fed on track for a December hike unless factors in the interim intervene to make this untenable. This would likely require a surge in market volatility due to a political or credit event in coming weeks or a severe deterioration in US economic indicators. The US economic surprise index currently sits near zero. i.e. positive and negative data surprises are cancelling each other. Friday’s US labour market report will provide the key US data points for this week.
Today the RBA will meet. Currently the market prices virtually no chance of any action at this meeting but almost fully prices a 25 bps cut, to 1.25%, within the year ahead. Our NAB colleagues core view remains that the RBA will ultimately have to cut its cash rate to 1.0% later next year, as growth momentum slows into 2018.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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