Disappointing US data weighs on rates although markets ignoring broader strengths. Eyes on local dairy auction and China data

By Raiko Shareef

NZ interest rates drifted higher yesterday, following the Monday night sell-off in US bonds in the wake of the Greek agreement.

Since then, US bond yields have pared some of their gains, in light of a soft US retail sales report.

The longer end of the NZ rates curve continues to exhibit more volatility than the relatively well-anchored short end. The 10-year swap yield rose by 4 bps yesterday to 3.92%, seeing the 2s10s curve steepen back above 90 bps.

US bond yields dropped lower thanks to a brace of disappointing US economic reports. Core retail sales slowed much faster than anticipated in June after May’s very strong gain. Separately, the NFIB survey of small business optimism dropped sharply in July, largely driven by labour market components. However, this is inconsistent with steady readings from other surveys this month (ISM, jobless claims, etc), and should be taken with a pinch of salt. The US 10-year bond yield fell by 5 bps to 2.40%.

The short-end of the NZ curve continues to be pinned down by heavy expectations of two further 25 bps rate cuts from the RBNZ by year end.

The next 24 hours may affect those expectations, depending on the results of tonight’s GlobalDairyTrade auction and tomorrow’s CPI report.

However, with the momentum in dairy prices still negative, and the CPI picked to land close to the RBNZ’s expectations, we don’t imagine the market will be given an excuse to sell off materially.

The swathe of Chinese economic data due this afternoon will also be worth watching.

—————————

Kymberly Martin is on the BNZ Research team. All its research is available here.

Daily swap rates

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