If we get a strong GDP result today, whatever way you look at it, the RBNZ is still likely to cut rates says BNZ

By Jason Wong

Intense selling pressure in global bonds over the past week stopped overnight and we’ve seen rates drift lower from recent highs, with Germany, UK and US 10-year rates down in the order of 4-5 bps. 

The US 10-year rate is currently 1.69%, down from the peak of 1.74% yesterday afternoon.

There was no news to drive the market; it was just a case of selling pressure being exhausted, for now.

Attention now turns to tonight’s economic releases, with retail sales the key focus, but the market will also be watching a couple of regional business confidence indicators and industrial production.  A necessary condition to get the Fed over the line with a hike next week is a positive surprise for retail sales and a stronger CPI outturn released later this week.  Even then, the divided Fed might still decide it’s too risky to raise rates and deferring to December might be seen as a better idea.

Yesterday, the local rates market saw a significant steepening of the yield curve, in line with global trends.  While the 2-year swap rate was steady at 2.065%, the 10-year rate rose 7bps to 2.64%.  So in the space of a week, the 2s10s spread has climbed 15 bps from 42 bps to 57 bps.

NZ’s 10-year government bond rate rose 7 bps to 2.54%, the highest level since the Brexit vote and up 42 bps from the mid-August low.

The global bond market sell-off has been felt at the very short end of the yield curve as well, with OIS pricing for the November meeting priced at 1.85%, up from as low as 1.76% a month ago.  The market currently gives little chance of the RBNZ easing next week.

From a monetary policy perspective, there’ll be two ways to view today’s likely strong GDP result – if the economy can’t generate inflation in the eighth year of an economic recovery and the economy growing at a 4+% clip, then the Bank will just have to stoke up the economy more and keep cutting rates. The alternative view is that inflation is dead and global factors are more important – no matter what the RBNZ does, inflation will not recover.  A central bank will never admit defeat so further rate cuts remain the most likely course of action.

Daily swap rates

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Jason Wong is on the BNZ Research team. All its research is available here.