RBA surprises analysts with rate cut while market prices in another one for March; expected fall in NZ yields might be tempered by rises offshore

By Raiko Shareef

Local interest rates had a subdued session ahead of the RBA policy decision, while offshore bond yields have risen on optimism around Greece’s debt negotiations.

NZ swap yields were little changed until the RBA rate decision, which fell right on the NZ close. The RBA surprised analysts by cutting its policy rate by 25bps to 2.25%.

While the RBA gave no indication about the direction of its next move, it would be unusual for it not to follow through with a second 25bp cut in the near term. The market is fully priced in for another cut by March.

Australian short-end swap yields were 15bps lower at the close.

This would bias NZ interest rates lower at the open today, but a sharp rise in offshore yields (as well as a big 9.4% bounce in dairy prices) overnight might temper that.

US 10-year bond yields are 10bps higher at 1.76%, despite poor US data. Factory orders fell by 3.4% m/m, steeper than the 2.4% decline expected. What’s more, the previous month was revised from -0.7% to -1.7%.

Offshore yields reflected broader market optimism about a viable resolution to the Greek debt stoush.

Locally, the Q4 employment report is due this morning. We pick a strong 0.9% rise in employment over the quarter, relative to the market’s 0.8% pick. But the main event today will be Governor Wheeler speech, due at 1pm.