Disappointing US data sees benchmark rates fall; eyes now on the Fed who are expected to maintain tightening stance, and the RBNZ

By Kymberly Martin

NZ swaps closed little changed yesterday.

Overnight, US 10-year yields fell from 1.82% to 1.78% currently.

NZ swaps initially pushed higher on the day, following the previous night’s offshore moves.

However the moves did not last and in the afternoon the market reversed, with swaps closing little changed. The market continues to price almost a 50% chance of an RBNZ rate cut by the end of the year.

At tomorrow morning’s meeting the Bank is unlikely to want to encourage this pricing. We suspect its statement will maintain a very subtle tightening bias, even if somewhat watered down from last month’s; “Some further increase in the OCR is expected to be required at a later stage”.

Last night, US 10-year yields took their cue from the disappointing US durable goods orders data for Dec (-3.4%m/m vs. 0.3% expected). As subsequent US data beat expectations, US yields were able to rebound from intra-night lows. Still, yields are somewhat lower than last evening, at 1.80% currently.

Locally the focus today for rates markets will be the AU CPI release. Consensus looks for a modest 0.3%q/q result. Our NAB colleagues believe this number could be as low as -0.1%. This would simply encourage RBA rate cut expectations which currently stand at almost 50bps for the year ahead. There could also be some contagion for NZ short-end yields.

Tonight, it is all eyes on the US Fed. Since the last FOMC meeting the market has lowered its expectations for where the Fed funds rate will be by year-end and three years out. Fed fund futures for year-end now sit at just 0.44%.

If the Fed is seen to remain committed to a first hike around mid-year, despite declines in the oil price, and easing by the ECB, US short-end yields will likely bounce. Some flattening of the US curve would likely result, as the impact on long-end (10-year+) yields would be more muted.