NZ swaps closed flat to down 1 bps on Friday, whilst NZGB yields closed down 3 bps.
On Friday night, US 10-year yields traded a tight range around 2.25%.
It was a quiet end to the week in the NZ market, with little on the domestic data front to drive yields. The market continues to price a 50% chance of a RBNZ cut at its 10 December meeting, and that the OCR will be cut to a trough of 2.41% by mid next year.
NZGB yields drifted a little lower on Friday, resulting in a slight widening in swap-bond spreads. We continue to believe that fundamentals do not justify negative swap-bond spreads in NZ, despite such moves offshore recently. The yield on NZGB 2027s ended the week at 3.58%.
There was not much on the US data front on Friday night. US 10-year yields traded a tight range, closing for the week at 2.26%. The market continues to price almost a 70% of a Fed hike at its 16 December meeting. On Saturday, Fed member Williams supported this pricing, saying; “assuming that we continue to get good data on the economy, continue to get signs that we’re moving closer to achieving our goals…[there is] a strong case that can be made in December to raise rates”.
Fed member Bullard noted that the pace of policy tightening would be sped up or slowed down depending on the incoming data. He suggested the market should brace itself for volatility, since the Fed would decide meeting-by-meeting whether to adjust policy. He also questioned conclusions from the October FOMC meeting that suggested the new neutral US real interest rate is close to zero. He said that other methods suggest that rate is 1% to 2%. He was likely intending to send a warning shot to the Fed fund futures market that prices a nominal FFR at just 1.66% in three years’ time.
It is a relatively low-key start to the data week. However, look out for today’s NZ net migration data. If these don’t begin to moderate from historic highs there will be implications for both growth forecasts and house price pressures. The RBNZ will be watching this data closely.