Longer-dated NZ swaps closed down 1-2 bps on Friday.
On Friday night, US 10-year yields declined from 2.22% to 2.16% on the back of the US employment report.
The slight flattening pressure in the NZ curve on Friday was assisted by the printing of a NZ$125m 10-year Kauri deal. It resulted in receiving pressure at that part of the curve. NZ 10-year swap closed down 2 bps, at 3.69%.
Meanwhile, 2-year swap drifted a little lower during the day but appeared to push back up to its previous level after Fonterra’s announcement on Friday afternoon. Despite Fonterra’s downward revision, the market appeared to take some comfort from the additional measures announced to attempt to ease the burden for dairy farmers. NZ 2-year swap closed unchanged at 2.90%.
The market prices that the OCR will be cut to around 2.57% by early next year. We continue to expect the RBNZ will deliver a 25 bps cut at its next two meetings, taking the OCR back to 2.50% by October.
On Friday night, US bonds yields drifted lower ahead of the US payrolls report, assisted by further falls in the global oil price. There was an initial spike higher in US yields on the payrolls release, as the headline number failed to provide any material disappointment. However, the move was swiftly reversed for 10-year bonds, as they remained bid into the close. US 10-year yields closed at 2.16%, near the lower-end of their range of the past few months.
By contrast, US 2-year bond yields held onto some of their post-payrolls push higher. The market holds onto some prospect of a rate hike in September (our central view). However, the softer-than-expected US hourly earnings number (2.1%y/y) will leave the debate wide open around the urgency for a first hike.
In the absence of expected domestic data releases today, the NZ market should take its cue from Friday night’s offshore moves. Some flattening pressure will likely be felt by the NZ curve at the open.