Ahead of a busy week, NZ swaps closed up 1-4 bps on Friday, while NZGB yields rose 3-6 bps.
On Friday night, US yields initially led global yields higher, following the US payrolls report, but drifted lower into the close.
The relentless rise in NZ longer-dated yields continued into weekend. NZ 10-year swaps have now risen by around 45 bps since the start of October, to 2.88%.
The rise in global yields has contributed, along with strong domestic data that has seen RBNZ rate cut expectations reined in. The market now prices less than one full 25 bps rate cut within the year ahead.
Heading into Thursday’s RBNZ meeting the market now prices around a 75% chance of a cut this week. In order to be consistent with its previous rhetoric, we expect the RBNZ to deliver a cut this week. We also expect it may maintain a modest easing bias. However, as highlighted last week, we now believe that 1.75% will mark the trough in the OCR for the cycle. NZ 2-year swap closed for the week at 2.21%, its highest level since mid-July.
US yields initially pushed higher on the solid (if below expectations) headline US payrolls number. The healthy 2.8%y/y increase in average hourly earnings, the strongest rise since mid-2009, likely also contributed. A December Fed hike remains highly likely and is more than 70% priced.
Fed Vice Chair Stanley Fischer referenced this market pricing whilst speaking at an IMF event on Saturday morning (NZT). He also said the US economy could “to some extent exceed our employment and inflation targets.” This could be viewed as implying some tolerance for overshooting its targets, in order to coax out more investment and hiring. This would be in keeping with Fed chair Yellen’s “high pressure economy” remarks of a few weeks ago.
However, the move in US yields proved short-lived. The overhanging mood of caution soon prevailed, heading into what will inevitably be a messy US election week. As risk aversion continues to rise (the VIX ‘fear’ index is at its highest level since late-June), ‘safe haven’ US Treasuries remain in demand. US 10-year yields ended the week below 1.78%, from intra-night highs near 1.82%.
An action-packed week gets off to a more leisurely start today. There is no domestic data due. However, Friday night’s decline in offshore yields may relieve upward pressure on NZ long-end yields as the market opens today.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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