New Zealand bonds close marginally higher ahead of FOMC policy decision

The New Zealand government bonds closed marginally firmer on Wednesday as investors remained cautious ahead of the Federal Reserve monetary policy decision and Fed Chair Yellen’s post-statement press conference, in an attempt to estimate the Fed's most likely step.

The yield on benchmark 10-year bond, which moves inversely to its price, slid 1/2 basis point to 2.290 percent, the yield on 7-year note also dipped 1/2 basis point to 2.035 percent and the yield on short-term 2-year note ended 1 basis point lower at 1.910 percent.

The Federal Open Market Committee (FOMC), at its upcoming meeting is expected to keep the federal funds rate on hold at 0.25 percent – 0.5 percent. Investors will remain keen to focus on the comments made by the Fed Chair Janet Yellen for any signals about future policy.

Moreover, it is worth remembering that in the last FOMC meeting minutes, most of the discussion was about the growth and development in the labour market because of subdued employment reports in April and May. Therefore, the central bank is likely to welcome the recovery seen in employment in June and the upheaval signifies that risk is skewed towards a more hawkish Fed despite Brexit.

Last week, the Reserve Bank of New Zealand in its unscheduled economic outlook update concluded that it is likely that further policy easing will be required as decline in the exchange rate is needed.

The central bank added the monetary policy will continue to be accommodative and long-term inflation expectations are well anchored. Also, the NZ dollar rate is holding down tradable good inflation and currency markets make it difficult to meet inflation objective.

Lastly, the surprised assessment mentioned that more easing is possibly needed to return inflation to target as many uncertainties hover around the country’s economic outlook.

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.

In addition, the New Zealand second quarter consumer price index rose 0.4 percent q/q, lower than the market expectation for 0.5 percent, as compared to 0.2 percent in the previous quarter. 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.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 8.5 points to 7,301.90.