By Kymberly Martin
NZ yields closed little changed on Friday. Offshore markets were similarly directionless, but a week of significant event risk looms.
NZ swap yields closed down 7-9bps across the curve last week. Heading into this week’s RBNZ meeting the market now prices a 15% chance of a cut on Thursday, and 27bps of cuts in the year ahead.
We do not expect cuts, but we do expect the RBNZ’s tone to be more dovish in its Monetary Policy Statement.
Since the previous statement, CPI has surprised to the low-side; data has shown more slack in the labour market than previously thought; data has pointed to weak growth in Q3.
However, we think there is sufficient to prevent the RBNZ cutting, including reheating house price pressures; signs of life in Q4 growth indicators; a more stable global backdrop.
Still, the more dovish tone may be sufficient to see NZ short-end yields head back to/beyond the bottom edge of ranges. Currently, 2-year swaps sit at 2.59%, 9bps off the lows of their 5-month range.
The 2s-10s curve, at 110bps, will be biased to steepen near-term if the market ramps up rate cut expectations.
The market is now pricing around an 80% chance of an RBA cut at its meeting on Tuesday. Our NAB colleagues are expecting a cut, with the low on the AU cash rate seen at 2.50%-2.75% next year. This suggests convergence of NZ and AU cash rates in 2013.
On Friday night, US 10-year yields traded sideways at 1.61% and German equivalents around 1.38%. The market appeared unmoved by data showing the Eurozone unemployment rate ticked up to 11.7% in October.
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