New Zealand bonds end mixed as milk prices fall at GDT auction, energy prices rally

The New Zealand government bonds closed narrowly mixed Wednesday as recent data showed that dairy product prices decline for the first time since July at the Global Dairy Trade auction. On the contray, investors sell off short-term debt following rally in energy prices.

The yield on benchmark 10-year bond, which moves inversely to its price, fell 1 basis point to 2.490 percent, yield on 7-year note also dipped 1 basis point to 2.215 percent and the yield on short-term 2-year note ended 1/2 basis point higher at 1.975 percent.

New Zealand’s Global Dairy Trade auction price falls 3.0 percent, GDT auction average $2880/MT. First decline since August and whole milk powder price index falls 3.8 percent. Additionally, ANZ commodity prices for September jumped +5.1 percent m/m (hits a 17 month high), from prior +3.2 percent. On an annual basis, it rose 10.6 percent y/y, from up previous 11.1 percent. Individually, dairy climbed +15 percent m/m and non-dairy export prices down 1.3 percent.

Moreover, the Kiwi bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Reserve Bank of New Zealand's target. Crude oil prices bounced above $50 a barrel after a report that U.S. fuel inventories may have fallen for a fifth straight week. The International benchmark Brent futures rose 0.86 percent to $51.31 and West Texas Intermediate (WTI) also jumped 0.99 percent to $49.17 at 05:00 GMT.

New Zealand’s Prime Minister John Key has signalled a rapid and unexpected rise in interest rates and "something big that happens internationally" as the biggest threats to the New Zealand economy. Said almost every recession we've had is driven by real interest rates going up and New Zealand has been enjoying economic growth at 3.6 percent of GDP - the highest grow rate in the OECD - on the back of a 70-year low in interest rates.

In additon, the RBNZ left the OCR unchanged at 2.00 percent in its September monetary policy meeting and indicated that the central bank will remain on track for an OCR cut at the November review. Despite solid economic growth, the RBNZ faces an uncomfortably slow return to the inflation target, with the risk that this could drag inflation expectations even lower.

We foresee that the central will hold its key interest rate until it examines the upcoming third quarter inflation, which is scheduled to release in late October. However, given the current market situation 25 basis points cut in November is widely anticipated among the investors.

“We expect the RBNZ will cut the Official Cash Rate twice more, rather than sit idly by while the NZD soars and inflation undershoots the target ad infinitum,” said ANZ in a report to clients.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 81.30 points to 7,271.16.