Markets price in rate cut in Australia but no rate hike for the US ahead of central bank decisions. Recent US economic data positive

By Kymberly Martin

It was another fairly quiet day in the NZ market. Swap and bond yields closed within 1 bps of opening levels.

Overnight, US 10-year yields traded up from 1.54% to 1.58%.

NZ yields have been consolidating at historic lows since the start of the week. NZ 2-year swap remains at 2.05%, as the market is virtually fully priced for a 25 bps OCR cut on 11 August.

Ahead of this the RBA will meet on 2 August. The market is pricing a 60% chance of an RBA cut at this meeting. Today’s AU Q2 CPI release will be the last key piece of data to influence pricing. Our NAB colleagues expect a 0.5% core CPI print (trimmed mean) relative to consensus at 0.4%. They judge this would be sufficient for the RBA to remain on hold next month. However, a low-side reading would require their view on the RBA to be revisited.

Currently the market prices around a 1.33% trough in the RBA’s cash rate compared to a 1.68% trough for the RBNZ’s OCR. Reflecting this difference, NZ-AU 2-year swap spreads trade at 29 bps.

Overnight there was a handful of US data releases, most of which came in above expectation. This, along with steady commodity prices helped support US yields.

An auction of US Treasuries (5-year) again attracted muted interest, with the lowest bid-cover ratio since mid-2009. However its impact on yields was fairly modest. US 10-year yields now trade around 1.58%, up from evening lows below 1.54%.

Ahead of the US FOMC meeting early tomorrow morning (NZT) the market prices around 15 bps of Fed hikes by year-end. We would be surprised if the inherently dovish Fed were to cause the market to notably ramp up its expectations for imminent rate hikes. That task will likely fall to future economic data delivery. Our core view remains for a 25 bps Fed hike at year-end.

Daily swap rates

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Kymberly Martin is on the BNZ Research team. All its research is available here.