It was a quiet start to the week in the absence of domestic data releases.
Overnight, US 10-year yields pushed up from 2.13% to 2.18%.
Ahead of the domestic data highlight for this week (tomorrow’s Q3 employment report) the market continues to price a small chance of a sub 2.50% OCR next year, but only around a 45% chance of a cut by year-end. Our central case continues to see a 25 bps cut by year-end.
The market’s expectations for the RBNZ will likely be influenced by what the RBA does and says at its meeting today. The market currently prices around a 40% chance of a cut at this meeting. The recent low-side surprise on AU Q3 CPI has opened further the door for a rate cut, but our NAB colleagues believe it is still unlikely the Bank will cut at this meeting. Given current fairly balanced market pricing, expect an AU rates response irrespective of outcome. NZ short-end yields will likely follow in direction, if not in magnitude.
This will then set the market up for the latest GDT dairy auction in the early hours of tomorrow morning. Our expectation is for a small decline in prices, though not the start of negative trend. Nevertheless, the market may be inclined to take a negative view of the outcome and lean toward increased expectation of a near-term OCR cut.
Yesterday the LGFA (Local Government Funding Agency) announced the details of its latest tender, scheduled to take place tomorrow. It is tendering NZ$20m of 2019s, NZ$50m of 2023s, and NZ$70m of 2027s. We suspect this will take a bit for the market to digest, although relative value to NZGBs has improved since the last tender.
Overnight, as European PMI readings beat expectations, German yields pushed higher. From 0.51%, 10-year yields traded up to 0.57%. Similarly, US equivalents traded up from 2.13% to 2.18%. This could apply a bit of steepening pressure to the NZ curve at the start of today.