NZ swaps closed up 2-4bps yesterday with a steeper curve. Overnight, US 10-year yields traded down from 2.28% to 2.23% currently.
The NZ curve pushed higher and steeper yesterday morning, mostly cued off the previous night’s moves offshore.
In the afternoon, swaps dipped from their highs in sympathy with moves across the Tasman, following the release of AU employment data.
The AU data initially inspired volatility in AU rates as it showed a rise in employment, the participation rate, and unemployment.
But ultimately AU swaps traded a bit lower e.g. 3-year swap declined from 2.26% to 2.23%.
NZ 2-year swap slipped from afternoon highs around 2.91% to end the day below 2.90%. The NZ 2-10s curve sits a little steeper at 81bps.
Last night the Bank of England unsurprisingly left its policy rate at 0.50%.
However, the market was surprised the decision was made with an 8-1 vote. It was anticipated that more than one voter would opt for a rate hike.
Following the announcement, UK bonds dipped 5-6bps across the curve. The market still looks for the BoE’s cash rate to be 25bps higher by mid next year.
However, the US Fed is still seen as more likely to make the first hike.
Tonight’s US payrolls data have significant potential to influence the market’s expectations for the US Fed’s near-term activity.
We believe the market will likely provide the greater response to a strong number, given current UST speculative positions and that yields are at the lower-end of ranges.
A disappointing number could see US 10-year yields trade back toward 2.15%.
However, a strong number could see the market re-focus on Sept as the likely meeting for a first Fed rate hike.
This could catalyse the start of a move in US 10-year yields back toward the upper-end of their range i.e. 2.50%.
Today’s Fonterra milk price announcement will be the focus for NZ short-end yields.
Ahead of this, the market currently prices around an 85% chance the RBNZ will cut at its Sept meeting and that the OCR will be cut to 2.58% by mid next year.