By Kymberly Martin
NZ swap and bond yields closed down 2-5 bps across the curve yesterday.
Overnight, US 10-year yields consolidated around 1.80% before pushing higher recently.
After the release of NZ Q4 CPI yesterday the entire NZ curve moved lower.
The reading (-0.2%q/q, 0.8%y/y) was below even our below-consensus forecast. The recent plunge in global oil prices was a dominant influence.
NZ 2-year swap closed down 4 bps at 3.69%. 10-year was a little firmer, down 2 bps, at 3.81%. The entire NZGB curve declined 5 bps, and is now notably below cash.
The market has moved to price around a 15% chance of a cut from the RBNZ within the next 6 months.
Ultimately we do not believe the RBNZ will deliver a cut, rather seeing it on prolonged hold. However, we expect the market will likely move to increase its pricing of rate cuts, given we expect NZ annual CPI readings to be flirting with zero for most of the year.
If the market were to move to price a 25 bps rate cut by year-end this would see 2-year swap dragged down toward 3.50%. Given we do not expect the RBNZ to follow through this level could set up an opportunity to pay swap.
Overnight, the Bank of Canada surprised the market by cutting its cash rate by 25 bps to 0.75%. This was its first move since 2009. It dramatically cut its growth and inflation forecasts for 2015 and stated the lower oil price would be “unambiguously negative” for the oil producing economy.
Overnight, US 10-year yields traded a tight path around 1.80% before pushing higher along with the oil price in recent hours. US 10-year yields now sit around 1.86%.
If the move extends, it will likely put steepening pressure on the NZ curve today. Today the BNZ Manufacturing PMI will be released.
Tonight, all eyes will be on the ECB’s meeting. Reports on news wires overnight suggested the ECB is set to announce a bigger QE package than generally anticipated.
It was suggested it may proposed asset purchases of €50b per month, around double the figures previously touted in markets. If delivered, at 10% of GDP this would put the programme close to the size of those initially carried out by the US Fed and BoE.
Of course with these numbers being bandied around, the risk of the ECB announcement disappointing is now even greater.
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