On Friday, NZ rates closed little changed as the market awaits the RBNZ’s meeting this week.
US 10-year yields currently trade at 2.06%, having traded toward 2.10% on Fridaynight.
Ahead of this Thursday’s RBNZ meeting, the market prices less than a 20% chance of an OCR cut this week. It fully prices a 25 bps cut by March next year and a trough in the OCR at 2.47% by mid next year. We see a higher probability of a cut this week, particularly given the almost 7% rebound in the NZ TWI since the RBNZ’s last meeting. But we still see this week as a close call.
If the RBNZ does not deliver a cut this week we anticipate it will likely cut at its Dec meeting. This would take the OCR to a cyclical trough of 2.50%. We see the OCR at that level throughout 2016.
US 10-year yields pushed up toward 2.10% in the early hours of Saturday morning. This occurred after the Peoples Bank of China announced a range of rate cuts to its lending, deposit and reserve requirement ratios. As risk appetite improved, US Treasuries sold off. But the move has not sustained. Yields have drifted lower since the start of the week, to sit at 2.06% currently.
Meanwhile, German equivalents were briefly boosted last night after the release of a German IFO survey, showing the overall business climate as being slightly better than expected. However, subsequently German 10-year yields have also drifted lower to trade below 0.50% currently. This is close to their lows of the past five months.
It is a busy week ahead, not least because the US FOMC and RBNZ will meet. In theory both meetings are ‘live’, though we see little chance of the US Fed actually pulling the trigger on a rate hike this week.
However, if its commentary still points toward the possibility of a hike in Dec it could undermine risk appetite fuelled by recent easing announcements from the ECB and PBOC. A spike higher in US bond yields is also likely.
But for the market to extend that move would likely require semi-stability in financial markets more broadly, combined with positive surprises from US data. Tonight there are a handful of US data releases. Today, NZ trade data will be released.