Markets pull back from the conviction that a November OCR cut is coming; Friday signal may clarify. Wholesale rates rise strongly

By Kymberly Martin

Yesterday, NZ swaps closed up 4-5 bps across the curve. Long-dated NZGB yields also pushed higher.

Overnight, US 10-year yields rose from 1.61% to 1.67%.

Yesterday’s Quarterly Survey of Business Opinion reiterated a very familiar theme. The domestic economy appears in good shape. Growth is stronger but inflation remains subdued.

Indeed, pricing reports for the last three months sagged to -4, from +1 in the previous survey. Pricing expectations for the coming three months eased to +7, from +11. These are broadly consistent with muted CPI outcomes for Q3 and probably Q4 too. Q3 CPI is due 18 October.

We expect a flat quarterly result, giving a 0.1% annual outcome. This should keep the RBNZ on track for a November cut.

However, the market was alert to an announcement from the RBNZ yesterday. It said it would publish comments by Assistant Governor McDermott, at a panel on macroeconomic policy, on Friday, in Melbourne. Given the forum, and release time (6.30pm NZT), we suspect it will be for general market consumption, rather than designed to influence market pricing (essentially for the 10 November MPS).

Although we anticipate a November cut, we certainly see the fundamental case for further easing becoming more tenuous. If the RBNZ wanted to indicate cold feet on its previously suggested November rate cut then this occasion presents an opportunity to drop a big hint. Otherwise, time is running out. The market may have been toying with similar thoughts. NZ short-end rates traded a little higher into the close yesterday afternoon. 2-year swap closed at 2.05% and 10-year swap at 2.54%.

Yesterday the RBA lefts its cash rate unchanged at 1.50%, as almost unanimously expected. The Bank’s tone and final paragraph was unchanged from the previous meeting. There was no explicit easing bias. However, our NAB colleagues continue to see potential for further easing later next year as AU growth momentum slows into 2018.

Overnight, in reasonably calm markets, US yields pushed higher across the curve. US 10-year yields traded up from 1.61% to 1.67% currently. German equivalents bounced from -0.11% to -0.05%. The move in German bonds, early this morning, appeared to be assisted by a report that the ECB will gradually taper bond purchases before the conclusion of its €1.7t QE programme. The US OIS market now prices almost 18 bps of Fed hikes for the December meeting. A December hike remains our core view.

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