By Kymberly Martin
NZ curves steepened a little yesterday, taking their cue from the Friday night’s offshore moves.
Last night the US Treasury market was closed for Labour Day and European core yields traded in a range.
NZ 2-year swap closed yesterday at 2.01%. This is at the upper-end of its fairly tight range of the past month.
We would not be surprised for it to push above its recent range in coming weeks. We see the risk that the market reduces pricing of RBNZ rate cuts, in the near-term. Key to this view is our expectation for a bumper Q2 GDP number next Thursday. We look for a 1.0% s.a. q/q% print, with upside risk.
Early tomorrow morning we also look for another solid GDT dairy auction, which will reduce market concerns for this struggling component of the NZ economy. Finally, we expect the RBNZ to remain on hold at its 22 September meeting. While this will not surprise most, it will prompt some re-pricing by the market that assigns slightly more than a 10% probability to a cut at the meeting.
But if short-end yields push higher, we would see this as setting up a better receiving opportunity ahead of the release of NZ Q3 CPI on 18 October. Our current forecast is for just -0.1%q/q. It will likely remind the market that although NZ growth indicators are sound, the economy is failing to produce inflation. If the RBNZ remains committed, as it appears, to trying to soon return CPI inflation to target (2%), it will have little choice but to keep cutting the OCR. Our core view remains for the RBNZ to cut in November and February, taking the OCR to a cyclical trough of 1.50%.
Although the RBA is not expected to change its rate setting at its meeting today, any tweaking of its language could influence the direction of NZ OIS pricing. Currently the market prices the RBA will cut its cash rate 25bps to an historic low of 1.25% within the year ahead.
Overnight the US Treasury market did not trade. Core German and UK yields traded a fairly tight range. German 10-year yields sit at -0.05%.