'Full lockup' for key Wheeler speech has markets expecting some major guidance; UST yields fall after 'flash' US GDP disappoints

By Raiko Shareef

Friday presented a quieter day for NZ interest rates, after the big moves post-RBNZ on Thursday. 

On Friday night, US Treasury yields fell sharply, aided by a softer-than-expected GDP result.

NZ swap yields were flat to slightly higher in a much more subdued trading session, with the 2-year closing 1bp lower at 3.56%.

Local data were generally softer in a headline sense, with building permits dropping by 2.1% m/m (from +10.0% prev) and the scorching pace pace of net migration easing off to +4100 from +5000 previously.

Local rates markets paid little attention to these data, fitting with our view that solid activity data in NZ will largely be ignored in favour of softer prices data, as the market believes the next RBNZ move will be a cut.

On that front, this week’s RBNZ speeches will be closely-watched. Deputy Governor Grant Spencer delivers an ‘non-public’ speech, though we’re wary of headlines. Governor Wheeler’s annual (public) address in Canterbury will be even more important than usual, as a platform to explain the Bank’s surprise policy shift last week.

The news that his speech will be preceded by a full media lock-up in Wellington ups the ante even further. We suspect local swap yields will struggle to sell-off ahead of that speech.

US 10-year Treasury yields fell by 11 bps to 1.64% over the course of Friday, with the decline starting well before a mildly disappointing US GDP release. Commentators cite strong bond inflows into the US, driven by yield appeal against Europe and Japan. 10-year yields are at their lowest level since early 2013.

It is a heavy data week globally. For us, offshore highlights will be the RBA’s policy statement on Tuesday, and the US employment reports on Friday night.

Locally, the fortnightly dairy auction and the Q4 employment report are both due on Wednesday, before Governor Wheeler’s speech.