New Zealand bond yields close modestly higher on stronger US payroll; RBNZ decision eyed

The New Zealand government bond closed marginally lower Monday after the United States posted strong payroll data on Friday amid renewed hope among investors for a Federal Reserve rate hike in 2016.

Also, investors awaited the decision of monetary policy meeting of the Reserve Bank of New Zealand (RBNZ) on August 11. Market participants are anticipating a 25 basis points interest rate cut from the central bank in the wake of rising deflationary pressure.

The yield on the benchmark 10-year bond rose 1-1/2 basis points to 2.230 percent, the yield on 7-year note climbed 1 basis point to 1.945 percent and the yield on short-term 2-year note ended flat at 1.805 percent.

The July US Labor Department employment situation report revealed a considerable +255k increase in non-farm payrolls, which comes well above market expectations for a +180k increase, as compared to the revised +292k result that occurred in June (previous was  +287k). This comes alongside no change in the unemployment rate at 4.9 percent, above expectations for a 4.8 percent result.

We expect that it is likely to be difficult for the investors to find any dovishness in this report, keeping alive September 21 Fed hike expectations (Bloomberg’s implied probability is at 26 percent).

Moreover, the RBNZ is expected to cut its official cash rate by 0.25 percent (25 basis points) in the upcoming monetary policy meeting, which is scheduled to take place on August 10. Moreover, the consumer inflation is likely to stay low for an extended period and since the labour market has lost momentum this year, we speculate a higher possibility for further monetary easing. We also think that the risks of strengthening New Zealand dollar will factor into the decision.

Interestingly, Bloomberg’s implied probability of 25 basis points rate cut by the RBNZ is at 100 percent. Also, 20 out of 25 economists polled by Bloomberg expected a 0.25 percent rate cut on next Thursday.

The RBNZ Governor Graeme Wheeler hinted a rate cut was imminent in his unscheduled economic update last month saying "further easing was likely". He said that the commercial banks should pass on any RBNZ rate cut to the general public and rate cut unlikely to boost housing market.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 39.88 points to 7,348.30.