Softer labour data will ramp up RBNZ rate cut expections and force bond yields lower

By Kymberly Martin

NZ swap and bond yields closed up 4bps across most of the curve on Friday. On Friday night US bonds failed to maintain their post-payrolls sell-off.

Despite their mid-week dip, NZ short-end yields closed little changed on the week. NZ 2-year swaps closed the week mid-range at the familiar level of 2.69%.

As we head into this week’s labour data (Tuesday’s QES and Thursday’s HLFS), the market is pricing just over a 50% chance of an RBNZ rate cut by mid next year.

We are wary of some softer looking filled jobs and especially paid hours data from the Quarterly Employment Survey, following their strong readings in Q2. This may cause the market to ramp up rate cut expectations as we head into Thursday’s HLFS data.

The data can be noisy, and a tick up in the unemployment rate toward the psychologically important 7.0% cannot be ruled out. There is therefore the notable risk that markets increase RBNZ rate cut expectations, resulting in lower short-end yields this week.

Both NZ bond and swap curves ended the week flatter. The 2s-10s swap curve closed the week at 105bps, around mid-range at present. The key influence on the long-end remains US long bond yields.

On Friday night US 10-year bond yields gapped from 1.72% to 1.78% on stronger-than-expected US payrolls data. However, bonds failed to maintain the sell-off. Demand for ‘safe haven’ bonds quickly returned to take yields back to 1.71% in the uncertainty leading up to this Tuesday’s US elections.

Central banks will also be in the spot-light this week. The RBA meets on Tuesday, and the BoE and ECB on Thursday. Irrespective of whether a cut is delivered this week, our NAB colleagues see the RBA cash rate 25bps lower at 3.0%, by February next year.