Our calculations show that post the FOMC Statement the probability of a June rate hike has moved up to 75%, from 63% at yesterday’s close. Between now and the rest of the year, some 36bps of hikes are now priced in, up 2bps from yesterday. US Treasury rates are higher across the curve, with the 10-year rate up 3bps to 2.31%. Earlier in the session, there was a report that a key advisory committee at the Treasury Department had advised that Treasury Secretary Mnuchin’s idea to create 50- and 100-year US bonds is unlikely to be successful.
In the local rates market, the short end of the curve showed an initial modest lift in rates post the NZ employment report, but once the focus turned to soft wage inflation, that was unwound. The 2-year swap rate closed the day unchanged at 2.31%, while the longer end of the curve was more influenced by global forces, which saw the 10-year swap rate down 2bps to 3.37%.
The market still sees any RBNZ tightening some distance away, with the first full rate hike not fully priced in until May next year. That’s still likely earlier than the RBNZ believes. That said, the combination of higher actual CPI inflation, a weaker NZD, strong NZ terms of trade and other factors should lead the RBNZ, at next week’s MPS, to project higher inflation than previously, and an earlier start date than late-2019 for the beginning of the tightening cycle.