The NZ curve steepened fractionally further yesterday and swaps outperformed bonds.
Overnight, US 10-year yields traded up from 2.22% to 2.26%.
In the absence of key local data releases yesterday, the short-end of the NZ swap curve, pushed a little higher in the morning, following offshore moves, but later traded back down. The market prices about a 50% chance of an RBNZ cut by year-end and a trough in the OCR at 2.43% by mid next year. NZGBs were a bit weaker, selling off by 1-3bps across the curve.
In a speech by RBA Governor Stevens yesterday morning contained no hints of impending easing, but did reinforce the mild easing bias the RBA has i.e. “were a change to monetary policy be required in the near term, it would almost certainly be an easing, not a tightening”. However, the RBA is still concerned about the housing market, with Stevens saying the “housing market may be calming…though by how much and how persistently we cannot yet know”. This rhymes with the RBNZ’s concerns.
Overnight, despite lower than expected US labour cost data, US Treasuries continued their sell-off. US 10-year yields now trade around 2.25%, as the market now awaits tonight’s US payrolls report. Given how far yields have run higher in the last few days, risks around tonight’s payrolls have now shifted. The onus is now on the data to surprise to the upside in order to continue upward momentum in yields. An in-line result, to slight disappointment, could see yields slump. US 10-year Treasuries will now likely find support as yields approach 2.30% (mid-Sep highs).
Also overnight, the Bank of England left rates unchanged, at 0.5%, as expected. However, it dampened down expectations for rate hikes, saying that CPI pressures were not sufficient for most MPC members to justify a rate hike. It also noted the outlook for global growth had weakened since Aug. However, the market still prices a first BoE hike by end-2016.
Today, NZ crown financial statements and the RBA’s statement on monetary policy will be released. However, the market will generally be in limbo as it awaits tonight’s US payrolls report.