By Kymberly Martin
NZ swap yields closed down another 1-2bps on Friday to be down 8-12bps on the week. On Friday night, US and German ‘safe haven’ bonds closed at crucial levels.
NZ 2-year swaps ended the week at 2.62%, towards the lower end of their range for the past 6 months. The 2s-10s curve remains around 104bps.
The market prices around an 80% chance of a RBNZ rate cut in the year ahead. In the week ahead the key influences on these expectations will be Wednesday’s retail sales figures and Thursday’s BNZ PMI.
As the market is already on edge following last week’s employment data it would be unlikely to take any negative surprises well. Further rate cuts would likely be priced. The PMI will also be closely watched. We look to see if it can claw its way back toward expansion (50) from its current reading 48.2.
The market may also be emboldened in its rate cut expectations by Friday’s release of RBA minutes. These clearly retain an easing bias even after the RBA remained ‘on hold’ at its last meeting.
The recent rise in AU short-end yields was curtailed by the release. The market now prices more than a 50% chance of an RBA cut at the December meeting, though only a 20% chance of a RBNZ cut.
Our central case remains for no cuts from the RBNZ though if such were to occur, it would be unlikely before the March meeting.
On Friday night, ‘safe haven’ US and German bonds were on a bit of a roller-coaster. However, yields closed off their lows, at critical levels. US 10-year yields closed at 1.61%. A break below the 1.55% level would open the way for a fall in yield back toward the 1.40% July lows.
There will be plenty in the week ahead to potentially impact on global risk appetite and demand for US bonds.
Tomorrow’s German ZEW survey will be important as will Wednesdays US retail sales data. Thursday brings preliminary Q3 European GDP releases along with the US Empire Manufacturing and Philadelphia Fed surveys.
The Fed also releases its minutes on Wednesday night. All this will occur in the backdrop of ongoing debate surrounding the US fiscal cliff. The only thing to predict with any certainty is that volatility is likely to increase.
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