By Kymberly Martin
NZ swaps dribbled a little lower yesterday by 1-2bps. 2-year swap closed at 2.61% and 10-year at 3.65%, maintaining the 2s-10s curve at 104bps.
Approaching tomorrow’s retail sales release the market is pricing an 80% chance of an RBNZ cut by mid next year. If the retail data comes in on the low-side as we expect, this may cause the market to ramp up rate cut expectations.
If 2-year swaps fall toward 2.50% (which marks the bottom of the range of the past 5 months) we would look to once again pay 2-year swap.
Similarly, if 5-year was to fall toward 2.90% we would look to pay. Unless we become convinced that the RBNZ is on course to cut rates we will maintain our ‘pay on dips’ policy, within fairly range-bound markets.
For us to make ‘cuts’ our central case we would need to see some combination of the following: No stabilisation in current economic indicators such as the PMI and PSI; Further signs of labour market softness; Easing in signs of bubbling house price pressures; A further slip in 2-year-ahead inflation expectations; A persistently high/higher NZD.
Overnight, US bond markets were closed for Veteran’s day. Elsewhere markets were fairly subdued. ‘Safe haven’ German bonds traded sideways. Spanish-German 10-year bond spreads, at 455bps, are at the highest level since late September.
The key for markets tonight will be the release of the German ZEW economic survey. Recent data, along with ECB Draghi’s comments, confirm the Eurozone ‘core’ is no longer immune from the pain of the periphery.
Most importantly, consensus is looking to see a further rebound in the forward looking ‘expectations’ component (to -10 from -11.5 previously) for the German economy.
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