Market expectations of US Fed tightening diminish; now end of 2018 before next full 25 bps cut is priced in. NZ swap rates reach fresh 2017 lows

By Jason Wong

Heightened geo-political tensions continued to support the bond market, with UK and Germany 10 year rates down about 2-3 bps.

The soft US inflation data had more impact on the short end of the curve than the long end, with 2-year rates down 3 bps to 1.29% and the 10-year rate down 1 bp to 2.19%.

Market expectations of Fed tightening continued to diminish. The odds of another hike this year fell from 36% to 25% after the CPI result.  One now has to look to the end of next year before a full 25 bp rate hike is priced in, well below the four rate hikes of the median expectation of FOMC members published in June.

On Friday, the Fed’s Kaplan said that he wanted to “see continued evidence – or more evidence – that we’re making progress on reaching our inflation objective,” adding that “I’m willing to be patient”, while the Fed’s Kashkari delivered his usual dovish missive.

NZ swap rates reached fresh lows for the year, with the 2-year rate down over 3 bps to 2.15% and the 5-year rate down 5 bps to 2.62%, driven by global forces.

In the week ahead, the local economic calendar is full of second-tier releases which shouldn’t be market moving.  Geopolitical developments provide the greatest source of market-moving potential, alongside US retail sales data and FOMC minutes from the last meeting.

Daily swap rates

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