New Zealand bonds flat in subdued trade; U.S. nonfarm payroll data in focus

The New Zealand government bonds traded flat during a relatively quiet Friday session that saw little data of much significance. Markets now await the United States non-farm payroll data for further direction.

The yield on benchmark 10-year bond, which moves inversely to its price, hovered around 2.51 percent mark, yield on 7-year note also remained steady at 2.24 percent and the yield on short-term 2-year note ended 1-1/2 basis point lower at 1.975 percent by 04:00 GMT.

The September Labor Department employment situation report will be released on Friday at 12:30 GMT. Overall, we expect non-farm payrolls will increase +180k in September (market expectations are for a +175k increase), versus the +151k reading seen in August, alongside no change in the unemployment rate of 4.9% (market expectations are for a 4.9% result). Great focus will likely be paid to gains in total private employment which we expect will increase around +170k.

Beyond the headline, we expect average hourly earnings will increase +0.2% m/m, alongside an increase in weekly hours to 34.4. On balance, despite the volatility seen in recent months, we anticipate further improvement taking hold in the coming months as conditions gradually improve. Given the greater focus on what the Fed is likely to do next following liftoff in December, we anticipate the September employment report will be sufficiently strong enough to justify additional moves higher (though other factors and subsequent reports will likely keep policymakers second-guessing).

On Wednesday, 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.

New Zealand’s Prime Minister John Key has signaled 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 addition, 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 52.99 points to 7,144.30 by 04:00 GMT.