Fed ‘dove’ Dudley out soothing frayed nerves and re-iterating actual increase in Fed funds rate was “very likely to be a long way off”

By Kymberly Martin

It was relatively quiet day in NZ swap markets yesterday. The market attempted to rally following developments offshore but there was plenty of paying coming through to see yields retrace off the lows. 

We continue to see paying interest from the ‘real’ economy i.e. from mortgage books and small and medium-sized businesses.

The swap curve closed a little flatter. 10 to 20-year swaps closed down 4bps, while 1-year was little changed.

The market continues to price around 50bps of RBNZ rate hikes in the year ahead. This is a little below our own forecast of 75bps over this time, but not unreasonable this far out.

NZ bonds also closed around 4bps lower in yield yesterday. The yield on NZ 10-year bonds now sits at 4.16% with a spreads to US and AU equivalents of 168bps and 34bps respectively.

Overnight, US data was generally on the positive side of expectations (May personal income 0.5% vs. 0.2% expected; May pending home sales 6.7%m/m vs. 1.0% expected).

However, the Fed’s preferred inflation measure the core PCE deflator continued to show little current pressure at 1.1%y/y.

Meanwhile, known Fed ‘dove’ Dudley was out soothing frayed nerves. He reiterated that an actual increase in the Fed funds rate was “very likely to be a long way off”.

In addition he emphasised that bond purchases could be prolonged if the economy does not meet the Fed’s somewhat ‘optimistic’ expectations.

A US auction of 7-year Treasuries attracted solid demand. US 10-year yields declined from 2.55% to 2.48%.

There is little on the domestic calendar to impact on markets today. Expect some further consolidation into week end. Tonight, Fed speakers Powell, Dudley and Lacker will again be out, likely trying to help curb any further harsh rise in yields.