The immediate reaction to the RBNZ’s no-change policy decision was higher interest rates, given that 6 bps of easing had been priced into the meeting.
The RBNZ’s projected 90-day rate track was nearly identical to that published in March, consistent with one more rate cut this cycle.
A common refrain is that the Bank is a reluctant cutter and, having passed on two opportunities to cut rates, the odds of further cuts are fast fading. This mood was reflected in the rates market, with the OIS curve now pricing in an OCR low of “only” 2.04% by early next year, so less than a full rate cut. Around 10 bps of easing is priced in for August.
The 2-year swap closed the day up 4 bps at 2.33%, after being up as much as 8bps at one stage. The retracement came as a risk-off mood from offshore began to prevail into the afternoon.
There was a flattening of the curve, with the 10-year swap rate down 1 bp to 2.85%, reflecting that offshore tone. With BNZ economists maintaining their call for an August rate cut, we see limited upside to short rates from current levels and would look for opportunities to receive short-end rates.
Overnight, we’ve seen US Treasury rates pushed down further, with the 10-year rate down 3 bps to 1.67%, largely reflecting the global risk-off mood.
Fresh record lows were made in German and UK 10-year rates. The ECB’s corporate bond buying programme is helping keep a bid tone to bond markets, with its purchase of some “junk” bonds highlighting the central bank’s intent to bring the cost of funds down for all and sundry.
In the day ahead, China could release data on credit growth, which is closely being monitored, and over the weekend it releases its monthly data dump on industrial production, retail sales and investment. Elsewhere, there is nothing much to note.