NZ yield curve flattens substantially in reaction to previous offshore yield slump; high probability of OCR cut soon; recent US employment data concerning Fed

By Kymberly Martin

NZ swap and bond yields closed down a further 2-8bps yesterday, with a stark flattening of the curve. Overnight, US 10-year yields rebounded from 1.32% to trade at 1.39% currently.

Yesterday’s move in rates was entirely attributable to the slump in offshore yields to historic lows. There was little in the way of domestic developments. The greatest influence was therefore felt at the long-end of the curve. NZ 10-year swap traded down 8bps, to 2.49%.

NZ 2-year swap closed down just 2bps, at 2.15%. The market still prices around a 65% chance of an OCR cut on 11 August and around a 1.84% trough in the OCR within the year ahead. We see a high probability of a cut next month, particularly if the NZ TWI remains near its current elevated level.

Overnight, while European equities have experienced a further decline, the S&P500 is currently rallying back into positive territory for the night.US 10-year yields have rebounded from new lows, along with a rebound in the oil price in the early hours of this morning. From intra-night lows below 1.32%, yields now trade near 1.39%.

Markets showed little response to the release of US Fed Minutes (6am NZT) as these pre-dated the UK ‘Brexit’ vote. However, the Minutes showed almost all officials saw the recent US payrolls flop as raising uncertainty. They also thought it prudent to wait and see the consequences of U.K. Referendum. As the full impact will not be known for some time, this plays into our core view that the US Fed will now delay a further hike until December, at the earliest. That said, the Minutes state that some FOMC members did argue against delaying rate hikes for too long.

The Minutes discussed uncertainty over where the ‘neutral’ rate now lies. Therefore, the FOMC thought it would be better able to gauge the effect of rate hikes if they were made gradually. The market is certainly pricing ‘gradual’ rate hikes. Fed fund futures only price 30bps of hikes over the coming three years.

This evening, RBNZ Deputy Governor, Grant Spencer, will speak on “macro-prudential policy and housing market risk”. Given it is a speech to a private audience (though published on its website), it is unlikely the ideal forum to announce new macro-prudential tools. However, it will likely at least, sow the seeds of what is soon to follow, as the Bank grapples with broadening house price pressures, but low CPI inflation.

Daily swap rates

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