NZ swaps closed down across the curve yesterday.
Overnight, US 10-year yields pushed back up 2.23%.
Yesterday NZ swaps traded lower from the open.
The catalysts appear to be follow on from Friday night’s decline in yields offshore, and downward revision to OCR projections from a couple of domestic forecasters. NZ 2-year swap closed down 4 bps, at 3.39%, while 10-year closed down 7 bps, at 3.89%. This has added to the number of forecasters now calling for RBNZ cuts.
Market pricing of RBNZ rate cuts is starting to look quite full, at 43 bps, for the year ahead. In particular we believe pricing of around a 45% chance of a cut at the next meeting (June 11) appears quite aggressive.
To be clear, we do believe the chances of the RBNZ being forced into cutting rates within the year ahead have risen.
We also believe the Bank would not embark unless it saw the necessity for a process of cuts. i.e. a 25bps cut would not be a ‘one-off’.
However, we continue to see the Bank’s hurdle to cutting rates as quite high.
We also believe it would take some time for it to become convinced that inflation expectations were “settling” at a low level, inconsistent with its 2% medium-term inflation target. This is particularly true as many medium-term inflation indicators are still pointing higher. We therefore see a cut at the next meeting, in just four weeks, as highly unlikely.
In a night without much key data flow, German and US bonds resumed their sell-off. German 10-year yields have traded up from 0.52% to 0.61%. US equivalents have traded from 2.13% to 2.23%. As previously noted, we believe increased bond market volatility will likely stay with us in the lead up to the first Fed rate hike. We see this happening in September.
The offshore moves could lead to some re-steepening of the NZ curve today.
While there are no domestic data releases, attention may fall across the Tasman today, where the AU Budget will be released. This may have implications for AU bond issuance. We will also be keeping an eye out for the usual post-Budget statements from rating agents on AU’s sovereign rating.