There was an upward bias to US rates ahead of the ISM release, with the 10-year rate reaching as high as 1.62%, possibly reflecting the stronger China PMI data.
Then the big miss on the ISM, which fell to its lowest level since January at 49.4, triggered a strong rally in Treasuries.
The 10-year rate fell as low as 1.55% but is trying to crawl its way back up this morning. It currently sits down 1 bp for the day at 1.57%.
Near-term tightening prospects have been priced out of the curve a little, with the OIS market showing the September meeting priced at +5 bps (previously 8 bps) and the cumulative rate to December at +17 bps (previously 20). It’ll take a stronger than expected US employment report tonight to make the September meeting a better than even chance of a rate hike. Then there’s next week’s non-manufacturing ISM data hurdle to clear as well, which needs to continue to show the services sector in good stead. All up, we still think that December is a better bet than September for a hike.
Before the ISM data were released, bond king Bill Gross was interviewed recommending that the Fed hike in September and follow up again with another hike by March. He shared the view of many when he said the Fed and other central banks “are addicted to low and negative interest rates,” and need to break the habit even if it means economic pain now as opposed to later.
As expected, there was little change across the NZ rates curve yesterday, with swap rates from 2-year out up 1 bp across the curve and government bond rates up 1.5 bps. The 2-year swap rate closed above the 2% mark (2.0025%) for the first time since 4 August. Strong NZ economic data amidst a backdrop of rising dairy prices are raising some doubt about how keen the RBNZ will be to cut rates further over the next six months or so.
The prospect of the Fed hiking rates later this year have added to that mix and for now at least the NZD is not rocketing ahead, with the TWI no higher than it was back in mid-July despite a 45% rebound in whole milk powder prices.
The local rates market should be quiet today ahead of the US employment report and with Treasury rates not far off their level from yesterday’s local close.