The RBA cut rates by 25bp to 3.85% as expected and moved to a more dovish stance. The market priced additional easing and NZD/AUD gained. A weak government bond auction contributed to a surge in long end JGB yields

Global equity markets are generally higher with decent gains across European and Asian indices. However, US equities are little changed, and consolidating near the recent highs, after a strong rally over the past month. Government bond curves have continued to steepen, particularly at the longer end of the yield curve, with a large selloff in Japan after a weak bond auction. The US dollar is generally softer against G10 currencies, though the AUD underperformed after the central bank meeting.

There was limited economic data to provide the market with direction. Front end US treasuries are modestly lower in yield and the curve steepened. Long end treasury yields moved higher are 30-year yields are approaching 5.0% again. Ongoing US budget negotiations have kept the focus on the fiscal deficit, particularly after the credit rating downgrade by Moody’s Ratings, at the end of last week.

Weak demand in the 20-year Japanese Government bond (JGB) auction, which saw the lowest bid-cover ratio since August 2012, contributed to a large selloff in longer end bonds. Yields have surged since early April, on concerns about rising government spending, and the Bank of Japan’s retreat from the market. 30-year yields are trading above 3.0% which is the highest level in at least twenty-five years. The Bank of Japan is holding meetings with market participants to gauge views on quantitative tightening, ahead of its June meeting, given the market volatility.

The Reserve Bank of Australia (RBA) reduced its policy rate by 25bp to 3.85% which was in line with expectations and fully discounted by market pricing. The Bank sounded cautious about the policy outlook given the uncertain global macro backdrop. Updated forecasts showed underlying inflation easing slightly more quickly to the mid-point of its target range and Governor Bullock said the board debated a potential 50bp cut.

The AUD fell sharply as the market priced additional RBA easing for this year. NZD/AUD jumped from 0.9185 to 0.9220 and has maintained the gain. The Australasian currencies are little changed in offshore trade set against the backdrop of a broadly weaker US dollar. The NZD is modestly weaker against the euro and pound.

The Canadian dollar gained after stronger than expected CPI data. Both the weighted median and trimmed mean measures of core inflation, reached the highest level in over a year, and contributed to the market trimming the amount of easing priced for the Bank of Canada.

Yields across NZ fixed income retraced lower in the local session yesterday reflecting moves in offshore markets. The price action was a complete unwind of the move in the previous session on Monday. There were limited domestic catalysts. 2-swap rates closed 2bp lower at 3.21%. The curve flattened. 10-year swap rates ended the day 5bp lower at 4.13%.

NZ government bonds also moved lower in yield with a flattening bias. 10-year NZGB yields declined 3bps to 4.65%. 10-year asset swap spreads have widened to +53bp, perhaps reflecting some investor caution ahead of the Budget on Thursday. Australian 10-year bond futures are ~9bp lower in yield terms, since the local close yesterday, which captures the period after the RBA. This suggests a downward bias for NZ yields on the open.

Turning to the day ahead, the only domestic data of note is the trade balance for April and the regional economic calendar is also quiet. UK CPI data for April is released later this evening and is expected to show a sharp pickup in the headline reading, relative to the previous month. The forecast increase is being driven by higher utilities and an increase in minimum wages and national insurance costs. Core inflation is also expected to move higher.

This note is from BNZ Research and re-posted with permission. The original is here.