By Kymberly Martin
NZ swap and bond yields closed down a further 1-3 bps yesterday.
Overnight, as negative sentiment gained the upper hand US, German and UK 10-year yields made historic lows.
Domestic data releases yesterday simply confirmed a now familiar story. The NZ economy is very solid and house price rises concerning, but inflation remains elusive.
The caps that are being applied to headline CPI inflation – via the strong exchange rate, commodity prices and partly-backward looking inflation expectations – is bound to keep worrying the Reserve Bank. So will increased global uncertainty post the ‘Brexit’ vote. We suspect this may be sufficient to prompt the RBNZ to cut the OCR again, most likely in August. The market prices this probability at around 65%.
However, it was interesting to see some quoted comments from Finance Minister, English yesterday. He acknowledged the high NZD was a concern but there was possibly little the RBNZ could do to influence it as, “traditional linkage between interest rates and the exchange rate doesn’t appear to be holding at the moment”.
In an additional development the RBNZ announced a scheduled speech on Thursday on “macro-prudential policy and housing market risk”. Given it is a speech to a private audience (though published on its website), it may not be the ideal forum to announce new macro-prudential tools. However, it will likely at least, sow the seeds of what is soon to follow. Prime Minister, Key, yesterday suggested “if they are going to make changes, probably they should get on with it”.
With plenty to consider with regard to the outlook for the NZ OCR, it is offshore factors that are currently the primary driver of NZ yields. Since the ‘Brexit’ vote, NZ 10-year swap has stealthily slipped 30 bps, to an historic low of 2.57%. Expect further downward pressure today given moves offshore overnight.
Overnight, a ‘risk-off’ mood prevailed. As equities and commodity prices tumbled, bond yields have fallen to historic lows. US 10-year yields have convincingly broken lower, to trade at 1.36% currently.
In our published note yesterday, we revised our forecasts for US 10-year yields to show the low on the expected range in Q3 at 1.25%. A rally toward 1.0% is unlikely in the absence of the Fed signalling easing (not our central case), or a greater flight to safety due to higher volatility.