Analysts expect two more AU rate cuts in 2017, but no US Fed cuts this year on weaker data. German yields push further into negative territory

By Kymberly Martin

NZ yields closed flat to up 2 bps yesterday. Overnight, US yields gapped lower on weak US data delivery.

The market has reduced its pricing of a year-end Fed hike.

There was not too much locally to disrupt NZ yields yesterday.

There was little surprise from the RBA, at Governor Stevens’ last meeting at the helm. The Bank left its cash rate unchanged at 1.5%, as expected. As is normal in the month following an easing, the final paragraph of its statement contained no explicit policy bias.

Our NAB colleagues continue to look for two further interest rate cuts in mid-2017, on the basis of an expectation that the growth outlook will soften in 2018. Without further stimulus, the AU unemployment rate would therefore begin to rise again. The market already prices one cut for next year. AU short-end yields were not significantly changed on the day.

NZ 2-year swap again closed at 2.01%. At the longer end of the curve yields pushed slightly higher. NZ 10-year swap closed at 2.45%, but is still not far from historic lows. Long-end yields will likely open lower today given moves offshore overnight.

US yields gapped lower on the delivery of a notably weaker than expected ISM non-manufacturing index. The market now prices less than 15 bps of Fed hikes for the December meeting.

US 10-year yields dropped from early evening highs near 1.62% to currently trade at 1.54%.

German equivalents had been declining all night and now trade at -0.11%.

Daily swap rates

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Kymberly Martin is on the BNZ Research team. All its research is available here.