Markets on lookout for signs of higher inflation - although the RBNZ seems unmoved and unconvinced by the local trend

By Doug Steel

The US 10-year Treasury yield nearly hit 2.36% during the night, then slumped back to under 2.31% before settling around 2.325%, down around 2 bps on the day. This is in contrast to a mild push higher (+1.5 bp) in German 10-year Bund yields. The US-German 10-year bond spread is at its lowest since November last year, at 189 bps.

The local swap curve steepened a touch yesterday as longer end yields pushed higher following moves in the previous offshore session. NZ 5-year swap rose 1.5 bps to just over 2.78%.

Meanwhile, short end rates remain heavily influenced by latest RBNZ guidance that the OCR is on hold for a prolonged period. The NZ 2-year swap yield did manage to lift a basis point yesterday in what was its first higher daily close since last Thursday’s Monetary Policy Statement.

However, at 2.23%, NZ 2-year swap yield is some 11 basis points lower than prevailed this time last week. The pre- MPS trading range for 2-year swap was around 2.25- 2.35%. The new range over coming months now looks likely to be around 10bps lower at 2.15%-2.25%.

Today, we expect NZ’s producer and capital goods price indexes for Q1 to reveal a broader element to the recent inflation pick up. But with the CPI already released for the quarter, and the RBNZ unmoved, expect little market reaction.

Likewise for Australia’s wage price index if it comes in at 0.5% for the quarter where the majority of forecasts are huddled.

Overnight, the EU’s April CPI will be closely watched for any signs of a pickup in core inflation given recent economic strength.

Doug Steel is a senior economist at BNZ Markets. All its research is available here.