NZ swaps closed down 2-5 bps yesterday. NZGBs yields fell 5-7 bps.
Overnight, US 10-year yields traded between 2.27% and 2.34%.
NZ yields dipped across the curve following the weekend’s ‘No’ vote from Greece.
NZGBs in particular benefitted from the heightened risk aversion. NZGB27 yields fell 7 bps, to 3.54%, but still managed to underperform their US counterparts. NZ-US27s spreads have widened from 116 bps to 119 bps. We expect NZGBs to underperform USTs on any sustained rally, but to outperform on the next leg of the UST sell-off.
NZ 2-year swap closed down 2 bps, at 2.94%. The market now fully prices an RBNZ cut at the July 23 meeting, as per our central view.
However, the market could yet run further, and begin to price in some possibility that the RBNZ delivers a 50 bps cut. Business confidence and dairy prices have evolved in a negative direction since the last MPS, as have global risks. Our key point is not that we seriously believe the RBNZ will deliver a 50 bps cut, but that NZ short-end rates could well start to price some chance of it.
US yields opened more than 10 bps lower yesterday morning, following the weekend’s results. However, US yields pushed higher following the decision of the Greek Finance Minister to resign last evening, and delivery of a solid final reading for the US composite PMI. However, in the early hours of this morning, US 10-year yields have traded back down from 2.34% to 2.29%.
Today brings two key local events with potential to impact on NZ short-end rates.
First, the Q2 QSBO. This is bound to look less positive than the previous reading.
Second, the meeting of the RBA. Although the Bank is expected to leave the cash rate unchanged at 2.0%, the RBA’s bias for future moves still has potential to influence the market’s expectations for future RBNZ moves.
Currently the market prices around a 90% chance of a further 25 bps cut from the RBA in the year ahead, and around 62 bps of cuts from the RBNZ.