The NZ curve flattened yesterday, as short-end swaps pushed a little higher while long-end declined a fraction.
Overnight, US 10-year yields traded up from 2.14%, to 2.19% currently.
NZ 2-year swap closed up 2 bps, at 2.89% yesterday. This was perhaps the result of some squaring up of receive positions heading into last night’s GDT dairy auction that was anticipated to show a bit of a bounce.
It did not disappoint. Average prices at auction rose 14.8%. It may be some time before we know if this is really the start of a better trend in prices. However, for today, it will probably push NZ short-end yields a little higher as the market pares its expectations for RBNZ rate cuts.
Our core view remains for a further 25 bps cut at the RBNZ next two meetings. This is a little ahead of market pricing that sees around a 2.52% OCR by April next year.
Yesterday’s RBA Minutes from its last meeting struck a more upbeat tone on recent economic developments. It appeared the Board is considering the possibility that non-mining business investment might surprise on the upside. There did not seem any active consideration of a further cut in the near term. Our NAB colleagues continue to see the AU cash rate as having troughed for this cycle at 2%, barring major negative overseas economic developments. The market still prices around an 80% chance of a cut by mid next year.
Overnight, US 10-year yields pushed a little higher, following the rebound in global oil prices and assisted by a stronger than expected US housing starts number. From intra-night lows below 2.14%, US 10-year yields now trade above 2.19%.
Tonight it will be all eyes on the US Fed’s Minutes. They may provide more detail on a key change in the Fed’s last statement .i.e. It inserted, the now famous, “some” into its assessment of how much more improvement in labour market conditions it was looking for. Although the Minutes relate to a meeting, prior to recent Chinese currency ructions, they could shed more light on whether a September rate hike is likely. Any strong suggestion it is, would likely prompt US yields higher, as the market is some way from fully pricing this outcome.