More positive risk sentiment is continuing to have a negative impact on the bond market.
US 10-year Treasuries are up 5 bps to 1.53%, after earlier reaching a three-week high of 1.55%. US economic data continue to positively surprise.
There weren’t any major releases overnight, but jobless claims held at their lowest level since April, consistent with tight labour market conditions.
Fed hikes still remain a distant prospect according to OIS pricing, but they are gradually being brought forward. Some 10bps of hikes are priced in by year-end, up from 4bps a week ago.
European bond rates are also higher, with Germany 10-year yields up 5 bps to minus 0.04% and UK 10-year gilts up 5 bps to 0.79%. The Bank of England didn’t cut rates but signalled a cut for the August review, just three weeks away. Another few weeks of post-Brexit data and a full revision of forecasts will allow the Bank to better judge the appropriate policy response.
The local rates market was strongly influenced by the RBNZ’s announcement of an updated economic assessment next week. Such an intra-meeting update is highly unusual, although there is the unique situation given the changed scheduling of OCR/MPS dates.
The market ignored that calendar quirk and decided that the RBNZ had a message to deliver.
We agree with that sentiment, and next week’s Statement is likely to be dovish compared to the June MPS. The Bank just needs to refer to the recent strength of the TWI and the implications of that on its forecasts and that would be enough for the market to have more conviction on an August rate cut. OIS pricing for that meeting fell 6 bps, taking the probability of a 25bps cut from 38% to 62%.
The 2-year swap rate fell by 5 bps to 2.19% and the 10-year rate fell by 6 bps to 2.55%. The overnight move in US Treasuries should see NZ’s yield curve steepen today, with upward pressure on the long end, but the short end underpinned by expectations of further RBNZ easing.
On the data calendar, NZ housing market data are likely to remain robust, while there are a number of activity indicators released in China this afternoon and the US overnight.