NZ swaps drift higher even as markets price more OCR cuts. Fed speakers review their options and remind markets of their obligations and limits

By Kymberly Martin

On Friday, NZ swaps closed up 1-3 bps across the curve. US 10-year yields ended the week at 2.09%.

In the absence of key data releases, NZ swaps drifted a little higher.

Still the market appears to remain comfortable pricing an OCR that will be cut to around 2.45% by mid next year. It prices around a 30% chance of a cut at the next RBNZ meeting on 29 Oct. We formally have a cut penned in for this meeting, though we see the odds around 50/50. Our core view sees a cyclical trough in the OCR of 2.50% by year-end.

On Friday night, with only limited data releases, ‘Fed-speak’ took centre stage. Fed Vice-Chair Stan Fischer said the Fed will raise rates this year providing slower global growth doesn’t undermine forecasts for higher inflation. 

He stressed that by law to Fed is required to focus on the U.S. economy.

Dudley also sees a hike by year-end but emphasised there is still a lot of data between now and December “so it’s not a commitment.”

Finally, Lacker (September’s FOMC meeting dissenter) said “we’re there” in terms of full employment, and highlighted the risk that inflation pressures may emerge with a lag if rate hikes are delayed.

US 10-year yields attempted to pushed higher, at one point trading above 2.13%, but drifted back to end the week at 2.09%. Data released on Friday night showed that speculative positions in US 10-year Treasuries have dipped back to a small net short of 2.5k, from a net long of 22.5k.

Today, REINZ housing data will be delivered, likely showing the sector remains in fairly good spirits. This will send a cautionary signal to the RBNZ against further aggressive OCR cuts.


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

Daily swap rates

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