US benchmark yields rise sharply again. Markets see 75% chance of an RBNZ rate cut tomorrow. Aussie recovery softens. Markets see 80% chance of a December Fed hike

By Kymberly Martin

Another day, another push higher in NZ yields. NZ swaps closed up 1-4 bps yesterday, while the rise in NZGB yields was contained to 1-2 bps.

Core offshore yields have pushed higher in the early hours of this morning, taking US 10-year yields to 1.86%.

With just over 24-hours until the meeting of the RBNZ the market continues to price around a 75% chance of a cut this week. Overall, a 25 bps cut is not quite fully priced within the year ahead. The recent run of strong domestic data has obviously instilled a small element of doubt. We continue to believe the RBNZ will be true to its previous indications and deliver a cut this week. But we think it will be its last. The OCR will trough at 1.75%.

NZ 2-year swap closed up 1 bps, at 2.24% yesterday while 10-year closed up 4 bps at 2.96%. We expect the latter might find some initial resistance to breaking through the 3.0% level.

The NAB AU business survey, released yesterday afternoon, is now suggesting some moderation in the AU non-mining economic recovery, with the aggregate level of business conditions dropping in October. Our NAB colleagues see this as a little concerning, though their medium-term views remain unchanged. They see the economy slowing into 2018. They expect the RBA to deliver two more 25bps rate cuts next year in response to ongoing low inflation and a more subdued growth outlook. Currently the market prices around a 40% chance of one further 25bps cut within the year ahead.

Early this morning, the US Fed’s Evans was quoted as saying “I am worried that inflation expectations have been moving down in a ways that’s not consistent with 2%”. He said he would feel more comfortable normalisation monetary policy if he had greater confidence the Fed was going to achieve 2% inflation. However, he felt the US unemployment rate was at a “very good” level.

The market is now pricing around an 80% chance of a Fed hike in December. Probably the last hurdle before a hike is virtually assured is a ‘no-surprise’ outcome from the US election. With voting now underway we expect results to trickle forth from early afternoon. If the race is quite clear we should have a good indication of the result by 3-4pm. If it is very close, however, we may need to wait until 5pm, or later.

A convincing Clinton win would likely nudge pricing for a Fed hike a little higher, along with US 10-year yields. However, US yields have already taken a step higher early this morning. US 2-year yields have stepped up from 0.82% to 0.85%, while 10-year yields are nudging 1.86%.

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