New Zealand’s 10-Year Yield Dives Below 1% For First Time As Manufacturing Gauge Sinks Into Contraction

Don’t look now, but New Zealand’s Performance of Manufacturing Index just printed in contraction territory for the first time since 2012.

The gauge dropped to 48.2 in July from a revised 51.1 in June.

July’s print is the worst in seven years and the first contractionary read since September of 2012.

This of course comes on the heels of RBNZ’s larger-than-expected rate cut last week, when the central bank surprised economists with a 50bp move. “GDP growth has slowed over the past year and growth headwinds are rising”, the central bank warned, adding that “in the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets”.

There’s now rampant speculation that negative rates and other extraordinary measures are in the cards. New Zealand’s Treasury Department said it could conceivably cut rates as low as negative 35bps in an emergency.

Read more: ‘Shocking’ New Zealand Rate Cut Roils Currency Markets

Commenting on the rather dour PMI data, Business New Zealand said that “while July’s result is no dead-set that the economy at large is contracting, the shrinkage is certainly something to take note of”.

Yes, and the bond market did, in fact, “take note”. 10-year yields fell 3bps, dropping below 1% for the first time ever.

Aussie yields fell in sympathy, with the 10-year down to 0.86%, a new record low.

In something of a cruel irony, the PMI print crossed around the same time RBNZ published an “analytical note” which purports to show that rate cuts should still be sufficient to juice growth and inflation.

“Our results suggest that movements in the OCR are still as effective as ever in New Zealand”, the study happily concludes. “This means that it is business as usual for the Bank -— further cuts in the OCR should boost the economy and inflation”.


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