Net market movements overnight have been modest, with a lack of newsflow and mixed messages on Middle East peace talks, although the latter hasn’t prevented Brent crude falling to USD94. US equities and Treasuries show little change. The NZD has made an incremental gain overnight in addition to the support it received after the RBNZ’s hawkish hold yesterday. It trades this morning near 0.59 and is higher on all the key crosses.
President Trump dampened expectations for an imminent peace deal, dismissing an Iranian media report that revealed details of the memorandum of understanding between the US and Iran. This included the US lifting its naval blockade, Iran and Oman having a mechanism over the Strait of Hormuz, and the restoration of commercial shipping in the Strait to prewar levels within a month. Trump said the MoU they released was a “complete fabrication”, adding “Oman will behave just like everybody else or we’ll have to blow them up”. He added that nobody will control the Strait of Hormuz but the US will watch over it. “We’re not talking about any easing of sanctions, no money, no nothing”. He indicated he was not satisfied with negotiations.
Despite the apparent lack of progress in a peace deal, oil prices are notably lower for the day, with Brent crude down over 5% to a USD94 handle, with traders noting some positioning unwinding.
US equities are relatively flat after closing at a record high yesterday. The US 10-year rate has traded a tight 4bps range overnight between 4.4450% and 4.4850%. European equity and bond markets also show small movements.
Currency markets show mostly small movements overnight and over the past 24 hours with only the NZD and AUD showing any notable movement. There has been an obvious positioning cleanout in NZD/AUD, with NZD and AUD sitting at opposite ends of the leaderboard following the combination of the RBNZ’s hawkish hold and softer Australian CPI data, driving the cross up over a cent since the RBNZ update to 0.8260. The AUD has fallen to 0.7135 and the NZD is trading near 0.59 after reaching at an overnight high just above 0.5910. All key NZD crosses are stronger and the TWI is up about 0.9% since the RBNZ’s update, although half of this simply unwinds NZD weakness in the day or so heading into the meeting.
Australia’s CPI fell by more than expected in April to 4.2% y/y, while the trimmed mean figure was in line at 3.4% y/y. Australian rates and the AUD fell after the release, with the market no longer fully pricing a fourth 25bps rate increase this year.
The RBNZ kept the OCR at 2.25%, as universally expected, although the close 3-3 split decision came as a surprise. The external members of the MPC voted for a 25bps hike, while the internal members voted to hold, leaving Governor Breman to provide the casting vote. However, the difference of opinion reflected only the timing of rate hikes, with the minutes noting that all committee members agreed that increasing the OCR at upcoming meetings would likely be necessary.
Market reaction was contained, reflecting the fact that the market has for some time been anticipating the need for higher rates, with the only real uncertainty being when the RBNZ would ultimately begin the tightening cycle. The Bank’s MPS cleared the near-term fog, paving the way for a rate hike as soon as the next meeting in July, with projections consistent with a front-loaded series of hikes. BNZ Economics brought forward its projected tightening cycle to begin in July, while still expecting the OCR to peak at 4% next year, slightly earlier than previously forecast.
The day ended with the market almost fully pricing in three 25bps rate hikes over the remaining four meetings of the year. Curves flattened, with the 2-year swap rate closing up 6bps at 3.52%, of which 5bps came after the RBNZ update. The 10-year swap rate fell 3bps to 4.23%, with the decline accentuated by a backdrop of lower Australian rates. For NZGBs, the 2-year rate rose 5bps, while the 10-year rate fell 2bps.
In the day ahead the domestic focus will be on the Budget this afternoon. Given the government’s repeated commitment to future fiscal balance, we see it likely that the projections for the underlying operating balance are similar to that presented at the Half Year Fiscal Update back in December. The borrowing programme could be similar or slightly higher, given indications of increased capital expenditure.
The US economic calendar is busy tonight, with releases including consumer spending, PCE deflators, durable goods, new home sales for April, and the second estimate of Q1 GDP. NY Fed President Williams is also due to speak, and we wonder whether he will join the growing chorus of FOMC members arguing that the next move could be just as easily a hike as a cut.
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Jason Wong is the senior Markets Strategist at BNZ Markets.
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