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.