US 10-year yields pushed higher early on Saturday morning to close for the week at 1.80%.
With less than a month to go until the RBNZ’s 10 November meeting the market now prices an 85% chance of a 25 bps cut at this meeting. We concur that a cut appears almost a done deal.
Probably the last remaining risk to that view lies with tomorrow’s release of NZ Q3 CPI. We expect a 0.0%q/q reading, or 0.1%y/y. Although the RBNZ has formally projected 0.2%y/y it has already made clear the error band around this forecast is 0-0.5%y/y. This implies the Bank would need to see a print above 0.5% to be genuinely surprised and consider backing-off a November cut. We see this as unlikely.
On Friday night, Fed Chair Yellen’s speech at a Boston Fed conference offered no fresh guidance on near term policy decisions. But it did ask a series of questions she thinks worthy of deeper academic research. The one that markets jumped on was the suggestion that running a “high pressure” economy might be a way of boosting aggregate supply (via, for example, boosting business investment as well as encouraging greater labour force participation). At the same time she acknowledged the potential dangers of this approach, specifically higher inflation and financial instability.
The long-end of the US curve sold-off, while shorter dated bond yields were little changed. The market still prices around an 80% chance of a December Fed rate hike.
It was interesting to note that just prior to Yellen’s speech the University of Michigan consumer survey was released. It showed that 5-10 year inflation expectations slipped to 2.4%, an historic low in the series since 1980.
An auction of US 30-year Treasury bonds, early on Saturday morning, just prior to Yellen’s comments had attracted a solid 2.4x bid-cover ratio. Ultimately, US 10-year yields ended the week close to 1.80%, their highest level since early-June.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
1 Comments
This implies the Bank would need to see a print above 0.5% to be genuinely surprised and consider backing-off a November cut. We see this as unlikely.
An official admission that OCR cuts (150bps) and rising CPI inflation statistics are not currently correlated would constitute real surprise for depositors forced to aid and abet a financially unstable residential property market at their potential detriment (OBR), minus due risk compensation.
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