RBNZ's McDermott says markets not paying attention to risks. Rate curve steepens after strong retail sales. Chance of September cut fades

By Jason Wong

Soft economic data set the scene for lower US Treasury rates on Friday.

Following the weak US retail sales and PPI releases, the market priced out some of the risk of further Fed tightening this year.

A hike by December is back to less than a better-than-even chance.

The US 10-year rate ended down 5 bps at 1.51%, after earlier reaching its lowest level during August of 1.48%.  Falling UK 10-year rates are helping keep US rates down, with a record low of 0.50% set on Friday, as the government stepped up its bond buying programme.

The local yield curve showed a bias to steepen on Friday.  There was upward pressure on longer yields, following the previous night’s offshore moves and the 10-year swap rate ended up 2 bps to 2.42%.  Further consideration of the NZ monetary policy outlook following Thursday’s MPS led to a 1.5 bp fall in the 2-year rate to 1.96%.  Very strong NZ retail sales data for Q2 were largely ignored. Comments reported on the newswires following an interview with Assistant RBNZ Governor McDermott on Thursday had an impact on the market.

McDermott made it clear that the RBNZ prefers to move rates with quarterly Monetary Policy Statements.  McDermott’s comments also suggested a lack of urgency to ease hard and fast, preferring to save some “bullets” for if “something really bad happens”. The market saw these comments reducing the chance of the RBNZ cutting again as soon as the September OCR Review.  Additional comments from McDermott suggested that the market didn’t pay enough attention to the one-sided risks to the outlook, with the publication of two scenarios that both showed downside risk to rates. 

On the back of these comments, the OIS market priced out the chance of a September rate cut, but increased the chance of further cuts in 2017.   The September meeting now prices in 6 bps of easing, November is priced at 23 bps of easing and by May/June next year, some 42 bps of easing has been priced in.

Daily swap rates

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Jason Wong is on the BNZ Research team. All its research is available here.