US treasury yields fall on FOMC minutes; NZ labour data stronger than expected; OIS market pricing in one more OCR cut

By Jason Wong

The focus of the market’s attention was the release of the US FOMC minutes. Trading was quiet ahead of their release. 

Ahead of that announcement, St Louis Fed President Bullard, the most dovish FOMC member, repeated his call for only 1 further rate hike this cycle, leaving the Fed Funds rate at 0.625% through to the end of 2018.

Following the release of the minutes, US Treasury rates are down circa 1-2bps across the curve.

The minutes didn’t convey a sense of urgency to raise interest rates and there was a fairly mixed range of views. “Several suggested that the committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis”.

The OIS market now prices 5bps of tightening by the Fed in September and 13bps by December, or in other words just over a 50/50 chance of a full tightening by year-end. This is a slight shaving down of tightening risk from yesterday, where the corresponding figures were 6bps and 15bps respectively.

In local trading yesterday we saw a nudge up in rates on the back of previous offshore moves. The 2-year swap rate was up 1bp to 1.96% and the 10-year rate was up 2bps to 2.41%.

NZ labour market data were stronger than expected, but this seemed to have only a modest knee-jerk reaction to the market. 

The stronger headlines pushed rates up slightly, but the move wasn’t really sustained as the data were fully digested. Massive employment growth of 2.4% q/q in Q2 was overstated due to the redesign of the survey. 

The unemployment rate gave a better picture and that showed a modest decline to 5.1%, slightly better than expected.

The NZ OIS market prices in 5bps of easing in September and almost a full rate cut for November (23bps). This reflects the messaging of the RBNZ, which seems to have a preference for moving at the quarterly MPS releases rather than the OCR reviews.

Daily swap rates

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