NZGBS: Cheaper Despite Moderating Core Inflation

NZGBs closed on a weak note, with yields 2-3bps higher on the day and 3-5bps higher than pre-CPI levels.

• Q2 headline CPI came in moderately lower than expected at 0.4% q/q with the annual rate easing to 3.3% from 4%. It is now approaching the top of the 1-3% RBNZ target. The RBNZ had forecast 0.6% q/q and 3.6% in May.
• The important domestically-driven non-tradeables are moderating but came in slightly higher than the RBNZ expected and is unlikely to be enough for them to ease at the August 14 meeting, which is likely to be when it chooses to communicate rather than move.
• The RBNZ’s measure of core inflation from its sectoral factor model moderated to 3.6% y/y in Q2 from 4.2%, the lowest since Q3 2021 but still above the central bank’s 1-3% band.
• Swap rates closed 2-3bps higher, with the 2s10s curve flatter.
• RBNZ dated OIS pricing is little changed across meetings. Nevertheless, OIS pricing sits 18-44bps softer for meetings beyond August versus pre-RBNZ Decision levels. By year-end, a cumulative 65bps of easing is factored into the pricing.
• The local calendar is empty tomorrow.
• On Thursday, the NZ Treasury plans to sell NZ$225mn of the 3.00% Apr-29 bond, NZ$225mn of the 4.25% May-34 bond and NZ$50mn of the 2.75% Apr-37 bond.