NZ yields drift higher, US yields fall sharply on surprise ISM report. But market still sees Fed hiking in December

By Kymberly Martin

NZ swap and bond yields closed up 1-2 bps across the curve.

Overnight, US 10-year yields declined to 2.16%, after a weak US ISM report.

NZ yields drifted only marginally higher yesterday, as the RBA’s meeting provided little to stir markets on either side of the Tasman. The RBA cash rate was left unchanged at 2% as widely expected. The accompanying Statement had very few changes. It continues to reference a “gradual improvement in conditions in non-mining sectors.”

Further easing would require a significant deterioration in the economic outlook, or a reassessment of growth in the non-mining economy. However, with inflation subdued, a mild easing bias remains. Our NAB colleagues see the Bank keeping the cash rate on hold, at 2.00%, throughout 2016.

Similarly, after an expected rate cut next week, we see the RBNZ keeping its cash rate on hold, at 2.50%, throughout next year. Therefore, we no longer see a strong directional trend in NZ-AU short-end spreads. Rather, we see them trading a range in response to individual data points and Central Bank rhetoric. Markets will likely remain inclined to price some level of cuts from both Banks in the months ahead.

Overnight, US yields fell fairly sharply after the US ISM manufacturing index declined to a six year low of 48.6. i.e. the sector is now in contraction. US 10-year yields fell from intra-night highs near 2.24%, to 2.16% currently. The market has reduced its expectation for a Dec Fed hike to closer to 70% (from above 75%). The US manufacturing sector appears under pressure from the higher USD. Doves may seize on this as reason to further delay a Fed hike. However, we expect that unless Friday’s payrolls report is a shocker, then the Fed will be keen to at least get one rate hike on the board, before re-assessing the landscape.

Overnight, the GDT dairy auction showed a modest 3.6% rebound in average prices. This may underpin NZ short-end yields at the open today. Tonight, the ADP report will likely be gauged as precursor to Friday’s all important payrolls report. Yellen is also scheduled to speak, and may be keen to keep the prospect of a rate hike later this month, front of mind.


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

Daily swap rates

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