US 10-year Treasuries have traded in a 1.85%-1.91% range overnight and are currently down 2bps at 1.87%. Recall that they touched a low of 1.79% in the previous session.
There were no major economic releases overnight, although getting my attention was the weaker than expected US quarterly productivity figures, down 3% at an annual rate. This means unit labour costs are higher, up 2.8% for the year.
So even with wages on the low side, inflation pressures have increased to the extent that there is pressure on business profit margins.
The key news for rates overnight was the BoE’s policy decision. The BoE voted 9-0 to keep rates on hold, with previous dissenter McCafferty abandoning his call for a rate hike.
Governor Carney indicated that there was no discussion to cut rates and MPC concluded that for the next move rates were “more likely than not to rise”. Inflation will average just 0.8% this year, with risks skewed to the downside, but then climb to 2% by 2018.
UK 90-day sterling futures barely moved, with most up about 1bp in yield across 2016-17. Despite Carney’s rhetoric, the curve still prices in a small chance of a rate cut over the next six months or so, before rates drift higher thereafter.
Locally, the bill futures strip continued to sell off, as the market digested the strong employment data and Wheeler’s speech the previous day.
OIS pricing suggests that only a 12% chance of a March rate cut is now priced in. Last week this was sitting closer to 50%. By June, that probability rises to 66%, whereas last week a full cut by June had been priced in.
Overall this week about 6-7bps of easing has been priced out of the curve.
Reflecting these changing rate expectations, yesterday the 2-year swap rate was up 2bps to 2.64%. The 10-year swap rate was flat at 3.32%. Some overseas investors are attracted to NZ’s higher long-term rates and we are seeing interest to receive those higher fixed rates.
Australian real retail sales are expected to show robust growth in Q4. The RBA’s Statement on monetary policy will expand on Tuesday’s unchanged policy decision, with updated forecasts and shouldn’t be market moving. The key release is US employment data overnight, which expected to show some payback in employment growth in Jan, following the stellar December result.