NZD recovers much of the fall seen in the wake of a surprise statement by RBNZ Governor Breman which implied discomfort with the recent sharp lift in rates. Lower short end rates drove steeper curves; more follow through can be expected ahead

Ahead of a busy week before Christmas, including the key US employment report tonight, market movements have been modest. US equities are slightly softer in early afternoon trading, global rates are flat to down slightly, and currency moves have been modest.  The NZD has recovered much of the loss seen after an unexpected statement from RBNZ Governor Breman that sent interest rates lower.

Fed speakers continue to do the rounds following last week’s policy update. Fed Governor Miran, who has repeatedly voted for steps of 50bps cuts, advocates a faster pace of easing because “experience suggests that labour market deterioration can occur quickly and nonlinearly and be difficult to reverse”.  Given policy lags, he wants to get to neutral faster. He also suggested a benign outlook for inflation, with disinflation in housing services countering elevated inflation for goods. NY Fed President Williams said after monetary policy had moved toward neutral, it “is well positioned as we head into 2026”.

The US NAHB housing market index edged up to an eight-month high of 39 in November but remains well below the long run average of 50. The Empire manufacturing survey was weaker but is too volatile to suggest anything, although of note the pricing indicators softened to levels not seen since earlier this year.

US Treasuries have traded tight ranges overnight, with the 10-year rate oscillating between 4.15-4.18% and currently little changed from the NZ close.  European and Canadian rates are slightly lower.

Canadian CPI data were slightly softer than expected, with headline annual inflation steady at 2.2% and both core measures edging down to 2.8%. The data did nothing to sway market expectations that the Bank of Canada will be on hold for an extended period.

Key China monthly economic indicators for November were weaker than expected, including a tepid 1.3% y/y gain in retail sales and fixed investment contracting at a faster pace.  Market reaction was limited to the extent that China’s economic weakness is well-acknowledged and the government policy will be supportive to counteract any further slide.

Oil prices have fallen to a two-month low, not helped by the softer Chinese data and possible optimism that a deal can be done to end the Russia-Ukraine war.  Brent crude is down about 1½%, trading just over USD60 per barrel.

Net currency movements since last week’s close have been modest.  The NZD has recovered much of its loss following RBNZ Governor Breman’s surprise statement yesterday afternoon (see below).  After falling to a low of 0.5766 after the NZ close, the NZD grinded back up through 0.58 and it currently sits just below the figure. The AUD has been oscillating in a tight range and is currently 0.6640.  NZD/AUD has recovered to 0.8720 after falling to just over 0.8680. NZD crosses against EUR and GBP haven’t fully recovered. JPY is the strongest of the majors from Friday’s close, albeit with an insignificant gain of 0.3%.  NZD/JPY has sustained a move back below 90.

In yesterday’s RBNZ press statement with comments from Governor Breman, which came out of the blue, she reiterated the view espoused in the November MPS, including the implied rate track being consistent with the OCR remaining at 2.25% for some time. She added that “Financial market conditions have tightened since the November decision, beyond what is implied by our central projection for the OCR”.  While this statement was factual, the market took the view that Breman was sending a clear message of some discomfort with the post November MPS market reaction, which had seen rates sharply higher, including the 2-year swap rate up over 50bps.

In a later broadcasted interview with 1News she said, “The purpose of cutting the OCR is to provide support for the economy, and that's what we want to see happening… if the banks hike mortgages and that reduces growth, we have to take that into consideration.”

Breman’s statement sent rates lower.  The 2-year swap rate had traded as high as 3.12% in the morning and by the close it had fallen to 3.03%, down 5bps on the day.  The swaps curve was steeper, with the 5-year rate down 4bps and the 10-year rate down 1bp.  As mortgage paying activity drops off during the Christmas period, swap rates have scope to fall further, led by the short end.

NZGBs showed a similar curve steepening, with rates down 8bps at the very short end, the 10-year rate down 2bps to 4.49% and the ultra-long bonds flat to slightly higher.

The economic calendar over the next 24 hours is packed.  Domestically, we’ll be interested in the monthly CPI indicators for November and the government’s half year economic and fiscal update.  The key release tonight will be the US employment report, where the consensus sees a softer labour market and the unemployment rate ticking up to 4.5%.  UK labour market data, global PMIs and US retail sales data are also released.

Jason Wong is the Senior Markets Strategist at BNZ Markets.