New Zealand bonds close mixed ahead of surprise economic update by RBNZ

The New Zealand government bonds closed mixed on Wednesday as investors await an unscheduled assessment of the economy from the Reserve bank of New Zealand, which is scheduled to take place on July 21.

Also, prices in the fourth Global Dairy Trade (GDT) auction of fiscal 2016-17 remained unchanged following a 0.4 percent decline in prices previously. On the other hand, whole milk powder rose 1.9 percent, more than reversing the previous decline, which limited the fall in bond yield.

The yield on benchmark 10-year bond, which moves inversely to its price, rose 2 basis points to 2.305 percent, the yield on 7-year note remained flat at 2.045 percent and the yield on short-term 2-year note ended steady at 1.935 percent.

The Reserve Bank of New Zealand surprised markets by announcing to issue an economic update on July 21, which comes way before the upcoming monetary policy meeting of August 11.

We foresee that the RBNZ will go for further rate cuts to counter deflationary pressure if inflation fails to revive, which is way below the target range of the central bank.

Moreover, New Zealand dairy auction GDT price index stood flat at +0.0 percent in the fourth auction in FY 2016-17, from prior down -0.4 percent in the previous auction. Whole milk powder rose 1.9 percent, more than reversing the previous decline, but the weak GDT data will slightly increase the potential for an RBNZ rate cut, reported economic calendar

On Monday, the New Zealand second quarter consumer price index rose 0.4 percent q/q, lower than the market expectation of 0.5 percent, as compared to 0.2 percent in the previous quarter. Petrol prices marked the largest upward contribution. Moreover, prices for tradable goods and services rose 0.6 percent, whereas prices for non-tradable goods and services rose 0.3 percent.

On an annual basis, it rose 0.4 percent y/y, against market consensus of 0.5 percent, from 0.4 percent during a year ago period. Lower prices for transport made the main downward contribution. Prices for non-tradable goods and services increased 1.8 percent, whereas prices for tradable goods and services decreased 1.5 percent. In addition, the New Zealand June services PMI slightly fell to 56.7, from 56.9 in May.

According to Reserve Bank of New Zealand new housing rules proposal, new LVR limit of 60 percent would be set for landlords across the country, essentially extending and lowering the current limit for Auckland investors of 70 percent. Loans would be exempted from the restrictions, including loans to build new homes, would continue to be exempted. The RBNZ Governor Graeme Wheeler said that the proposed restrictions recognise the higher risks associated with such lending.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 17.84 points to 7,172.67.