Rate change prospects 'live' for Fed and RBNZ, less so for RBA. US yields rise, NZ yields mixed

By Kymberly Martin

NZ swaps closed down 1 bps yesterday while NZGB yield closed up 1-2 bps.

Overnight, US 10-year yields have traded a 2.26% – 2.31% range.

Yesterday afternoon the RBNZ released its Q4 inflation expectations survey. Respondents’ view on annual CPI inflation in two years’ time eased to 1.85%, from 1.94%. It’s still in touch with the 2.00% level, consistent with the mid-point of the Bank’s target range. However, it’s not as close as it was.

At the margin these results add weight to our central view of a further RBNZ rate cut at its 10 December meeting. At the least, they are consistent with the Bank’s current easing bias. The market now prices a 50% chance of a December cut. Another soft GDT dairy auction overnight (-7.9%) will likely keep the market mulling the prospect of a near-term rate cut, this morning.

The RBA released its November Minutes yesterday. Our NAB colleagues see the RBA having moderately upgraded its confidence in the transition in the Australian economy from mining-driven growth to non-mining sources of demand. There remain uncertainties to the outlook in both directions. Arguably more downside risks reside offshore while currently some upside surprises are emerging from the domestic side. As such, the Minutes suggest little risk of any near-term RBA rate cut. However the Bank acknowledges that spare capacity affords the scope to ease monetary policy further if required. Our central view remains a cash rate on hold at 2.00% throughout 2016. The market still prices around a 65% chance of a 25 bps cut by mid next year.

US 10-year yields pushed a little higher overnight, in the backdrop of positive equity markets and data showing US core CPI steady at 1.9%y/y. Yields now trade at 2.27%, having touched intra-nights highs above 2.31%. Ahead of tonight’s release of the Oct US FOMC Minutes the market prices almost a 70% chance of a Fed hike at its 17 December meeting.


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

Daily swap rates

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