New Zealand bonds plunge on higher inflation expectations; employment report eyed

The New Zealand government bonds plunged on Tuesday after the RBNZ in its latest survey mentioned that the country’s inflation will expand 1.65 percent in two-year span of time. Also, investors await the second-quarter employment report to judge the country’s labour market condition.

The yield on the benchmark 10-year bond rose 1-1/2 basis points to 2.180 percent, the yield on 7-year note also jumped 1-1/2 basis points to 1.935 percent and the yield on short-term 2-year note ended 2-1/2 basis points higher at 1.820 percent.

The Reserve Bank of New Zealand (RBNZ) in its latest quarterly survey of expectations showed that the country’s inflation is anticipated to increase 1.65 percent within a span of two years, which is still below the central bank’s target band of 2 percent.

However, this positive result, which showed a marginal rise in inflation expectations from its previous forecast of 1.64 percent, will nevertheless give relief to the RBNZ and also lower pressure on the central bank for any further rate cut.

Moreover, the New Zealand Treasury in its monthly economic indicators for July mentioned that the key economic data releases point to stronger economic growth in the June quarter than expected in the Budget. Also, economic and fiscal update business surveys point to robust economic activity, supported by stronger-than-expected export volumes and consumer spending. They further mentioned that global financial markets stabilised in July but the economic outlook remains slightly weaker.

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.

Lastly, investors will remain keen to focus on the GlobalDairyTrade (GDT) Price Index and Q2 employment report. Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 27.43 points to 7,329.20.