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Despite last week’s stronger than expected wages and employment outcomes, we remain confident that the RBA will deliver a 25bp rate cut tomorrow. Market pricing also reflects that view and so the main interest will be in the Governor’s post-cut messaging, which is expected to maintain a similar degree of hawkishness to that delivered in February, albeit with an extra nod to global uncertainties. Beyond tomorrow’s rate cut, we view current RBA pricing as far more reasonable than the extremely dovish path that prevailed only a couple of weeks ago. A terminal rate around 3.35%, just below neutral, is basically in line with Westpac’s own forecast. Beyond Tuesday’s move, we would not expect the market to factor-in more than around 2 more rate cuts at any time.
Moody’s decision to remove the US AAA sovereign credit rating has dominated headlines over the weekend and will set the tone for bond markets as we begin the week. Moody’s was the last of the three major ratings agencies to lower the US rating, so this should not really be a major surprise for markets. Timing is everything, however, and the announcement will add to the negative sentiment that was already evolving around fiscal policy and its implications for debt and deficit. It will also add to the broader narrative of a diminished prestige for USTs that will further erode their safe haven status.
Outright yield direction, as well as curve slope direction, are hostage to US developments at present. NZ short end is anchored, so that higher term rates and steeper curve momentum remains intact.
The Budget on 22 May will update the NZGB four-year ahead issuance programme. We expect a modest $4bn increase in issuance, over the four years, which is close to market expectations and thus approximately market-neutral. NZGB i-spreads are elevated and exceed valuations, suggesting there’s scope for a small rally in response.

This Week’s Charts of Interest:

Having pared back from extremes, the market’s terminal rate now reflects WBC’s forecast.
The press conference continues to be important to setting the market tone.
Updated SMP forecasts will provide important insights into the medium-term risk rewards.
Victoria’s Budget will be closely analysed for its financial management initiatives.
Semi issuance is on a faster track then previous years, implying scope for pre-funding of FY26.
Semi issuance by maturity bucket and type
In NZ, we visit our NZGB 2034 i-spread trade.
NZGB returns to USD investors
NZGB offshore share themes

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