The NZ curve steepened yesterday, as short-end yields closed down 2-3 bps while yields at the long-end pushed a little higher.
The dominant force at the short-end of the curve yesterday was the release of the NZ Q3 employment report. The report was underwhelming, showing that employment growth has slowed. This saw short-end yields push lower, although the magnitude of the move was quite modest.
The market now prices slightly more than a 50% chance of a 25 bps cut by year-end and a 2.43% trough in the OCR by mid next year. Combined with the soft dairy auction this week, the report adds weight to our central view that the RBNZ will cut, to a cyclical trough of 2.50%, at its Dec meeting.
The long-end of the curve seemed to take its cue from the previous night’s rise in offshore moves, and was less influenced by the domestic data. NZ 10-year swap actually closed up 1bps, and the 2-10s curve steepened to 80bps. We anticipate further steepening today given offshore moves overnight. We continue to expect steepening toward 120bps on this curve over the medium-term.
Yesterday’s LGFA tender showed weak demand for the NZ$70m of LGFA 2027s on offer. Only NZ$60m of bids were accepted with a wide 10.5 bps. The LGFA 2019 and 2023 tenders were tighter. However, we think the results are symptomatic of a market that already seemed quite well positioned in the bonds, in the absence of further strong growth in offshore participation. Spreads to NZGBs have improved and may start to tempt back interest.
Overnight, US yields took another leg higher.
Yields were fairly impervious to the ADP employment report that came in close to expectation. However, they gained upward momentum after the release of a much stronger than expected US ISM non-manufacturing index. Yields were further boosted as Fed Chair Yellen said, during her testimony to the House, that if incoming data continue to point to growth and firmer prices then a Dec hike was a “live possibility”.
The market now prices a 58% chance of a Dec hike. US 10-year yields have pushed up to above 2.23%. Tonight there is a handful of US data releases and Fed speakers to lookout for, but the market will have all eyes now firmly focused on Friday night’s US payrolls report. A solid report could propel US 10-year yields into the upper-half of their long-held 2.00-2.50% range. This would likely result in a steeper NZ curve.