US Fed buying time, waiting for pick-up in inflation. Aust. RBA to consider rate cut next week, but chances of that uncertain

By Kymberly Martin

NZ swap and bond yields pushed higher by 3-5 bps yesterday.

Overnight, US 10-year yields traded a little lower, to 1.54% ahead of the US FOMC meeting and down to 1.52% subsequently.

Taking their cue from moves in US yields the previous night, NZ yields opened a little higher yesterday morning. They gained a further prompt in the afternoon after the release of stronger than expected (by consensus) AU Q2 CPI data.

The AU data showed a relatively low quarterly inflation outcome, but perhaps importantly, did not reproduce the super-low Q1 CPI result. Our NAB colleagues believe the outcome will not see the RBA revising down its inflation projections. Some evidence of exchange rate pass-through may reduce concern the Bank had on achieving its forecasts.

NAB believes a further rate cut will be considered at next Tuesday’s. The outcome is likely to be a close call. However, they believe yesterday’s CPI does not demand a further adjustment, especially with non-mining GDP above trend, business conditions above average, and reasonable employment growth outcomes. The market now prices around a 55% chance of an RBA cut next week.

NZ 2-year swap closed up 3 bps at 2.08%. 10-year swap closed up 5 bps at 2.51%. NZGBs also sold off (yields rose) ahead of the NZDMO’s tender of NZD150m of NZGB 2033s this afternoon.

Early this morning the US FOMC issued its statement. It was a bit less dovish than previous.

It stated that “near-term risks to the economic outlook have diminished”. However, overall the statement was little changed except for the first paragraph. Here it highlighted the labour market has strengthened, recognising the most recent US payrolls number. It pointed to strong growth in household spending but soft business investment. Its view on inflation appear little changed i.e. there aren’t too many upward pressures yet, though once again the Fed points out that this partly reflects declines in energy prices. Overall, we’d say the Fed is buying time, and not trying to point the market toward an imminent hike, but our view of a hike by year-end seems on track.

Ahead of the US FOMC meeting the market priced 14 bps of Fed hikes by year-end and the US 10-year yields traded at 1.54%. After an initial post-meeting spike higher, US 10-year yields now trade at 1.52%. The market still prices around 14 bps of Fed hikes by year-end.

Daily swap rates

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