NZ swap and bond yields closed flat to down 2bps yesterday. Overnight, US 10-year yields traded down from 2.04% down to 1.98%.
Yesterday morning’s focus was the published speech by RBNZ Governor, Wheeler. He reiterated that “some further easing seems likely”. We take this to mean a further 25bps cut by year-end. Otherwise, much of the speech concentrated on reasons to be cautious about cutting any more aggressively.
The Bank was cautious of further inflaming the housing market. It stated “housing market considerations do influence our thinking on the OCR”. It also seems wary of using up all its ammunition, in case of a global-led slowdown further ahead. In addition the Bank mused as to whether current borrowing costs were actually constraining investment. If not, how would lower rates help? We concur with these arguments.
The market has slightly reduced its pricing of near-term rate cuts. It now prices around a 50% chance of an OCR cut by year-end. We would still see the odds at 80-90%, but would see a 2.50% OCR as the cyclical trough.
Yesterday, NZGBs were also in focus as the NZDMO confirmed that it planned to price its new NZGB2033 today. Data of non-resident bond holdings were also released. These showed that the proportion of NZGBs held offshore had dropped to 68.7% in Sept from 69.5% previously. This data will be worth watching to gauge if this is the start of declining offshore demand for NZGBs or merely a reflection of re-positioning ahead of the imminent issuance of the new longer-dated bond.
In the early hours of this morning, US retail sales data came in below expectation. This saw the US 10-year yield gap quickly from above 2.04% to 2.00%, subsequently drifting lower.
Across the Tasman today the AU employment report will be released. This has potential to influence market pricing which currently sees more than 40bps of further RBA cuts by late next year. Our NAB colleagues continue to see it as more likely the RBA remains on prolonged hold, with its cash rate at 2.00%.