New Zealand bonds close mixed after trade deficit widens in Sep, Fed rate hike bets support yields

The New Zealand government bonds closed mixed Thursday after the country’s trade deficit widened unexpectedly in September. Also, rising speculations on the December Federal Reserve interest rate hike supported the Treasury yields.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 1 basis point to 2.670 percent, the yield on 7-year note ended 4 basis points higher at 2.353 percent and the yield on short-term 2-year note climbed 2-1/2 basis points to 1.995 percent.

New Zealand's September trade deficit widened to 1.4 billion NZ dollar, higher than the market expectations of deficit NZD1.14 billion, from prior deficit of NZD1.2 billion, revised from 1.26 billion NZ dollar. Total exports came 3.47 billion, lower than the consensus of 3.53 billion, from prior NZD3.39 billion.

The value of goods exports fell at a seasonally adjusted 4.8 percent to 12 billion dollar. Fall in meat exports (13 percent fall in the quantities exported) was a leading factor in a drop in total goods exports. Imports climbed 2.2 percent to 4.9 billion NZ dollar due to rise in capital goods imports, expectations was for 4.68 billion, prior was 4.65 billion NZ dollar.

Moreover, the bonds prices fell following hawkish comments from the Fed policymakers’, which suggested that a December hike was quite likely.

Investors now await the RBNZ’s survey of inflationary expectations report, which is scheduled to be released next week, which could be the catalyst for rate cut from the central bank.

The key for how dovish the RBNZ’s forward guidance will be on the 10th November Monetary Policy Statement will be the result of their inflationary expectations survey on Wednesday, November 2, said Roger J Kerr, a fixed income advisor, reported interest.co.nz.

If it appears that super low actual inflation over recent years has transferred through to be imbedded in super low inflationary expectations two years ahead in time, then the RBNZ will have no choice but to cut the OCR to 1.75 percent and signal clearly that they will cut again unless inflationary expectations lift, he added.

Last week, New Zealand’s third-quarter consumer inflation rose by 0.2 percent, higher than the market expectations of flat outcome, from up 0.4 percent in the previous quarter. On an annual basis, inflation dropped to 0.2 percent, the eighth straight quarter below 1 percent. However, we foresee that inflation reading was not far from the central bank's expectation, and will not stand in the way of it cutting the official cash rate again in November.

In addition, the Reserve Bank had forecast a 0.1 percent increase in its August Monetary Policy Statement. The annual inflation rate slowed from 0.4 percent to 0.2 percent, just above the record low of 0.1 percent that it briefly touched in December last year, reported Westpac in its Research note.

We also support the fact that the Reserve Bank of New Zealand is still widely expected to cut rates at its November 10 policy meeting to 1.75 percent.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 45.75 points to 6,941.95.