By Kymberly Martin
NZ swap yields dipped a little yesterday morning following comments from RBNZ Governor Wheeler. However, yields closed little changed. Overnight, US 10-year yields consolidated around 2.11%.
In recent weeks the market had got a little ahead of itself in terms of pricing a starting point for the RBNZ’s rate hiking cycle.
It had moved toward pricing a 50% chance of a hike by year-end. However, in yesterday’s prepared speech RBNZ Governor Wheeler threw cold water on these expectations.
The speech outlined the dilemma the Bank faces between an ‘overvalued’ NZD and the risks to the NZ banking sector posed by house price appreciation.
However, its conclusions seemed to err on the side of keeping rates lower for longer. The Bank clearly stated it believes beginning a rate hiking cycle well ahead of other global central banks that maintain significant accommodation, would lead to further NZD appreciation.
It also outlined work underway on macro-prudential tools to address the risks housing poses to the NZ banking sector. While these tools are in no way a substitute for the OCR they remain a key priority at present.
The overall message received is the Bank appears in no hurry to meaningfully adjust its most recently published 90-day bank bill track. This implied a first OCR hike early in H2 next year. For now, we think this tone will likely keep short-end swaps fairly capped. We see 2-year capped around the 3-3.1% level for now.
The 2-10s swap curve sits around 117bps. We still see it contained within a 95-125bps range, despite the recent sell-off in long-end US bonds. Overnight, US 10-year yields failed to push higher, after US data was marginally on the softer side of expectations.
Yesterday’s NZ DMO tender of $120m of NZGB20s was uninspiring. There was a relatively low 2.2x bid-to-cover ratio. The range of successful bids was wide at 3.28-3.36% and above the prevailing mid-market yield of 3.27%. This suggests very tepid demand for NZGBs in the current global bond sell-off. NZ 10-year bond yields closed at 3.62%, now more than 45bps above their early May lows.
Today, we expect the ANZ Business Confidence index to send a now familiar message that the domestic economy is on a fairly solid footing.
Tonight, EU unemployment data and CPI estimate, along with the US Chicago PMI, will be the key trans-Atlantic data points to watch.
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1 Comments
The overall message received is the Bank appears in no hurry to meaningfully adjust its most recently published 90-day bank bill track. This implied a first OCR hike early in H2 next year. For now, we think this tone will likely keep short-end swaps fairly capped. We see 2-year capped around the 3-3.1% level for now.
Are central bank bosses captured by their incumbent political masters in the run up to an election? - I should say so!! And will remain so while the charade of growth is paraded about without the veil of shame.
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