Global rates higher with spillover from a poor ultra-long bond auction in Japan, but the UST 10-yr rate hasn’t pushed much higher. The NZD sustained the modest gain seen after the RBNZ’s new neutral bias, following its rate cut

Newsflow has been light overnight. US equities are consolidating, with focus on Nvidia’s earnings results after the close later this morning. Global rates are higher for the day, with spillover from a poor ultra-long bond auction in Japan, but the US 10-year rate hasn’t pushed much higher overnight. The NZD has sustained the modest gain seen following the RBNZ’s new neutral bias, following its 25bps rate cut yesterday.

There has been little news to drive the market overnight, including a lack of economic data. Following yesterday’s strong 2% gain for the S&P500, the index is down slightly ahead of Nvidia’s earnings report.

Regarding US-EU trade talks, the FT reports that senior EU officials have privately painted a bleak picture of negotiations that may force the bloc to accept higher US duties for the long term, with the 10% “reciprocal” tariff likely to stay. The US has insisted this 10% rate is not part of trade negotiations. The bloc has been left facing an unpalatable choice between making concessions or retaliation, according to officials and diplomats.

In the bond market, there were nerves ahead of Japan’s 40-year bond auction yesterday, with ultra-long bonds under considerable pressure due to a buyer’s strike and the sharp lift in yields this year generating significant paper losses for Japanese life insurers. Yields rose into the event and the auction still met the weakest demand since July, adding further upward pressure to yields. The poor auction supports the case for Japan’s finance ministry to reduce issuance at the long end of the curve.

Higher Japanese rates spilled over into US Treasuries during the NZ trading session.  However, the net movement overnight has been modest, with the 10-year rate barely higher from the NZ close, at 4.48%, taking it up 4bps for day. The FOMC minutes for the May meeting didn’t offer anything new, with broad agreement amongst committee members to take a patient approach to policy, given heightened economic uncertainty.  Fed economists viewed the possibility that the economy would enter a recession to be almost as likely as the baseline forecast and continued to view the risks around the inflation forecast beyond 2025 as skewed to the upside.

Currency movements have been modest.  The NZD is the best performer for the day, albeit up just 0.2% since this time yesterday, finding support after the RBNZ’s policy update (see below).  The NZD traded a high of 0.5980 in the aftermath of the release before settling around 0.5960. 

JPY has been the weakest of the majors, with USD/JPY up 0.4% and NZD/JPY up 0.6% from this time yesterday to 86.4.  Other NZD crosses are modestly higher, with NZD/AUD recovering to 0.9275, NZD/GBP up to 0.4425 and NZD/EUR at 0.5280.

The RBNZ delivered the widely expected 25bps cut to the OCR, taking it down to 3.25%.  This took cumulative rate cuts from August last year to 225bps.  Market reaction suggested that the policy update was more hawkish than many expected.  On this note, the vote was not unanimous, with one MPC member voting to keep policy unchanged.  Furthermore, there seemed to be some sympathy with that view, as “some” members noted that leaving policy on hold would allow the committee to better assess the impact of increased economic policy uncertainty and guard against the risk of higher-than-expected inflation from supply side effects of increased tariffs.

While the published modelled rate track implied that the OCR could be cut further, with a terminal rate of 2.85%, the media release did not convey an easing bias, and Governor Hawkesby confirmed at the press conference that the Bank did not have a policy bias. Clearly the Bank is looking to maintain full optionality on the policy outlook.

The move to a neutral bias caught the rates market offguard, with the 2-year swap rate rising as much as 14bps, before closing up just under 11bps for the day at 3.27%. The 5-year swap rate rose 10bps while the 10-year rate rose 7bps. Positioning was likely a factor, as NZGB yields rose by less, with rates up 3-9bps across the curve and a flattening bias. The market still sees scope for further RBNZ easing, albeit with less conviction on the short-term path. Another 25bps rate is fully priced and with a small chance of an additional cut, with a terminal rate close to 2.95%.

On the calendar today, the ANZ business outlook survey will be of some interest. Tonight sees the release of the second estimate of US Q1 GDP, initial jobless claims and pending home sales.