NEW ZEALAND: RBNZ’s Conway Suggests Further Easing As “Signalled In November”
RBNZ chief economist Conway said today that further easing of the OCR as “signalled in November” should be possible given easing domestic price intentions and inflation expectations. He is ‘confident domestic inflation will abate’ given spare capacity in 2025. In its November projections, it had another 50bp rate cut in Q1 2025 and the only meeting this quarter is on February 19.
- He said that long-term nominal rates are estimated at 2.5% to 3.5% and Conway expects them to trend down towards 3%, excluding shocks. Thus the current OCR at 4.25% is restrictive.
- As the policy rate approaches neutral, Conway stated that the RBNZ will “need to ‘feel our way’” given heightened uncertainty.
- Potential growth is being pressured by weak productivity and moderating migration flows though. It is expected at 1.5-2%/year over the next three years.
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OIL: Oil Outlook Still Bearish, Gains Corrective
Oil prices were higher on Friday supported by the fifth consecutive EIA-reported US crude drawdown and light volumes ahead of year end, which are likely to continue this week. Crude has been range trading for a number of months as various influences offset each other leaving benchmarks little changed in 2024. Geopolitical threats to oil supply persist, while the market continues to worry about a significant surplus in 2025.
- WTI rose 0.9% to $70.26/bbl after reaching $70.75 and is now up 3.8% this month but only 1% on the year. Recent gains continue to be seen as corrective with initial support at $66.01 and resistance at $71.97.
- Brent is 1% higher at $74.17/bbl following a high of $74.29. It is up 3% in December but down 0.5% in 2024. The technical outlook remains bearish with initial resistance at $75.79 and support at $69.95.
- Conflict in the Middle East has continued with Israel now focussing on the Iran-backed Houthi rebels in Yemen who have been targeting international shipping in the key Red Sea route.
- The strength of China’s oil demand has worried markets and while there is some optimism that increased stimulus in 2025 may boost it, the lack of details limited the upside to oil prices. US exports of crude to China fell 46% in 2024, according to Kpler, due to weak demand but also China shifting to other sources such as Iran and Russia.
AUSSIE BONDS: Cheaper With US Tsys, Light Holiday Volumes
ACGBs (YM -3.0 & XM -7.0) are cheaper, with the 3/10 curve steeper, after US tsys finished mostly cheaper on Friday. However, light holiday volumes persisted with the Mar'25 10Y contract (TYH5) dealing in a 10-tic range.
- US short-end bid helped projected Fed rate cuts into early 2025 gain slightly vs. prior (*) as follows: Jan'25 steady at -2.7bp, Mar'25 -13.3bp (-13.1bp), May'25 -18.5bp (-17.7bp), Jun'25 -26.5bp (-25.7bp).
- Markets will be closed on Wednesday for the New Year's Day holiday. US data this week includes MNI PMI and Pending Home Sales on Monday, FHFA housing data on Tuesday, weekly claims and construction spending on Thursday, and ISMs on Friday.
- Cash ACGBs are 2-7bps cheaper with the AU-US 10-year yield differential at -18bps.
- Swap rates are 1-6bps higher, with the 3s10s curve steeper.
- The bills strip is slightly weaker, with contracts flat to -1.
- RBA-dated OIS pricing is little changed. A 25bps rate cut is more than fully priced by April (130%), with a 63% probability of a February cut.
- Today, the local calendar will see RBA's Jones-Fireside Chat at Conexus at the Superannuation Chair Forum. The next data releases are CoreLogic Home Value and S&P Global PMI Mfg on January 2.
BONDS: NZGBS: Bear-Steepener To Start A Holiday Shortened Week
In local morning trade, NZGBs are flat to 2bps cheaper, with a steeper 2/10 curve, after US tsys finished last week mostly weaker and near the session’s worst levels. However, light holiday volumes persisted.
- US tsys pared losses on Friday after Wholesale Inventories came out lower than expected with a modest down-revision to the prior, Retail Inventories were in line with expectations, and the Advanced Goods Trade Balance came out a little wider than October's, with the $102.9B shortfall above $98.3B prior (and $101.2B expected).
- US markets will be closed on Wednesday for the New Year's Day holiday; otherwise, they will have full sessions for the week's balance. US Data includes MNI PMI and Pending Home Sales on Monday, FHFA housing data on Tuesday, weekly claims and construction spending on Thursday, and ISMs on Friday.
- The local calendar is empty today and will remain so until the release of CoreLogic Home Values on January 2.
- The NZ-US 10-year yield differential is 3bps lower at -18bps, its lowest level since late 2020.
- Swap rates are 2-3bps lower, with the 2s10s curve unchanged.
- RBNZ dated OIS pricing is little changed. 54bps of easing is priced for February, with a cumulative 125bps by November 2025.
