By Kymberly Martin
NZ yields closed little changed on the day, ahead of the domestic data highlight for the week, today’s CPI release.
We see CPI in the process of bottoming ahead of a pick-up from Q3 this year. However, the market may respond to a low-side reading by further reining in expectations for rate hikes in the year ahead.
In addition, recent news reports suggest the RBNZ is on the verge of announcing its loan-to-value (LVR) restrictions for banks.
We continue to emphasise that this is rather separate from its mandate to ensure CPI price stability.
However, the LVR announcement could prompt markets to blur the two mandates, further pulling back expectations for OCR hikes in the year ahead.
We would see an additional pull-back in yield as an opportunity to hedge at more attractive levels.
In our view, the market continues to significantly under-price the level of OCR hikes (200bps on our forecasts) that will unfold in the coming two years.
We do not expect the current pull-back in yields to be deep or prolonged. Rather we see it is as a transitory dip on the path toward higher yields by year-end and beyond.
Overnight, US 10-year yields climbed toward 2.64% ahead of US data releases. The disappointment on June advance retail sales saw yields quickly knocked lower to trade around 2.55% this morning.
This illustrates our fundamental view that while US yields are establishing a higher range, data will continue to drive short-term volatility.
Tonight, a key driver of German and US ‘safe haven’ yields will be the German ZEW survey. The market remains highly sensitive to signs that momentum in ‘core’ Europe is fading.
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