By Kymberly Martin
Following the meetings of the US Fed and RBNZ, NZ swap and bond yields closed down 4-14bps and curves flattened. Overnight, core global long yields traded lower.
The RBNZ left its OCR at 2.0% yesterday, but confirmed its easing bias by leaving its final statement unchanged; “Our current projections and assumptions indicate that further policy easing will be required”.
The RBNZ could not avoid acknowledging recent positive domestic developments but, notably, it downplayed these. Equally the global backdrop was still seen as “uncertain”, including the outlook for global growth, commodity prices and the political environment.
Inflation is seen as being held down by negative tradables inflation but the Bank expects a rise from the December quarter. However, the Bank still sees negative risks to inflation expectations. It has previously highlighted these expectations are crucial to its policy making process.
All up the statement left us comfortable with our core view for an RBNZ rate cut in November, with a further cut in February being a line ball call. The market now prices almost a 70% chance of a November cut and a 1.66% trough in the OCR, from its current level of 2.0%.
NZ 2-year swap closed down 7bps at 2.03%, while 10-year swap closed down 10bps, at 2.54%. The move at the long-end of the curve was also influenced by the post-US FOMC decline in US long yields. There was also a strong rally in longer-dated NZGBs. The yield on NZGBs declined 14bps, with swap-bond spreads widening in the process. We anticipate good demand at the NZDMO’s auction of NZD 150m of NZGB 2033s today.
In a data-light night, equities and bonds rallied in sync. US 10-year yields declined from 1.65% to 1.62%, while German equivalents traded down from 0.0% to -0.1%. Tonight, several Fed members are to speak on a panel at a Philadelphia Fed conference. There may be some attempts to nuance the Fed’s message after yesterday’s FOMC meeting.