New Zealand bonds close modestly higher as business confidence dips in October

The New Zealand government bonds closed modestly higher Monday as business confidence dipped in October. Investors now await the RBNZ’s survey of inflationary expectations report, which is scheduled to be released this week, which could be the catalyst for a rate cut from the central bank.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 1 basis point to 2.725 percent, the yield on 7-year note ended nearly 1 basis point lower at 2.408 percent and the yield on short-term 2-year note also slid 1 basis point to 2.020 percent.

New Zealand’s October business confidence fell to 24.5 but that's still the second-highest reading this year, from 27.9 in September. Activity outlook fell to 38.4, from prior 42.4, its highest since July of 2014. Also, inflation expectations remain flat over the month at 1.44 percent, the survey showed.

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 17.38 points to 6,960.68.