NZ swap and bond yields closed down 3-4 bps yesterday.
Overnight, US 10-year yields pushed up from 1.98% toward 2.04%.
In the absence of domestic data releases yesterday, NZ yields took their cue from the moves offshore at the end of last week. NZ 2-year swap closed down 3 bps, at 2.67%, the lower-end of its range of the past month. Meanwhile 5-year swap closed at 3%, its lowest level since Nov 2012.
Overnight, equities made strong gains and measures of credit risk narrowed. They appeared relieved by the prospect that a Fed rate hike is less imminent after last week’s soft US payrolls report.
Fed fund futures continue to price little prospect of a hike by year-end.
Still, ‘safe haven’ US Treasuries experienced some selling pressure overnight as general risk sentiment improved, even as US Services PMI data came in marginally below expectation. US 10-year yields have pushed up from evening lows, below 1.98%, to above 2.03%.
There are two key events on the local calendar today. This morning the Q3 NZIER Business Opinion Survey will be released. We expect headline confidence to drop from last quarter, potentially quite sharply. This could encourage the market in its expectation for rate cuts from the RBNZ, although the data has already been pre-empted by the release of soft monthly indicators such as the ANZ business survey.
Currently the market prices the OCR to be cut to 2.43% by mid next year, inclusive of a 75% chance of a 25 bps cut by year-end. This seems a fair representation of risks around our central view that the OCR will be cut to a cyclical trough of 2.50% by year-end.
Ahead of today’s RBA meeting the market prices almost 40 bps of cuts by the Bank by mid next year. Our NAB colleagues do not expect this week’s statement to encourage pricing of cuts. They remain of the view the RBA has a very high hurdle to cutting rates. They believe the RBA sees the current cash rate as “about right” in terms of balancing sustainable growth and financial risks.