On Friday it was a quiet day in the NZ market ahead of the long weekend. NZ swap and bond yields closed little changed.
US 10-year yields closed last week at 1.73% but have pushed higher at the start of this week to now trade just above 1.76%
NZ 2-year swap closed last week at 2.09%. With just over two weeks until the RBNZ’s November meeting the market prices around an 83% chance of a 25 bps cut. It also prices a trough in the OCR around 1.68% within the year ahead.
From a strategy perspective this pricing seems fair. i.e. we see a November cut as virtually a done deal. It seems reasonable to maintain some precautionary pricing of a further cut, though the fundamental case for such is increasingly tenuous.
Since the start of the week, through to the early hours of this morning, US yields traded in a very tight range. However, in the past few hours they have pushed higher.
This occurred despite a pretty notable 2.5% decline in the WTI oil price since late last evening. The move higher in yields coincided with the release of the October US Markit manufacturing PMI that printed some way above consensus expectation. US 10-year yields currently trade just above 1.76%. We continue to see a 1.60-1.90% range sustaining in the months ahead.
Early this morning Fed’s Bullard (dove), said there was no urgency to raise the Fed funds rate but a December hike is “most likely”. The market would agree. The US OIS market prices only around a 30% chance of a Fed hike next week, but more than a 70% chance of a 25 bps hike in December.
Daily swap rates
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Kymberly Martin is on the BNZ Research team. All its research is available here.
2 Comments
This occurred despite a pretty notable 2.5% decline in the WTI oil price since late last evening.
Oil as collateral for dollar credit creates negative pricing issues when the lender has to resort to liquidating the collateral to liquidate/roll it's own liability.
I suspect that Chinese firms/banks substituting oil for “dollar” payments from largely African former borrowers may be one factor (perhaps one of the biggest factors) as to why there are so fewer acceptances funding Chinese economic activity. Read more
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