German ZEW survey shows current and forward-looking economic sentiment slipping

By Kymberly Martin

With little to impact on domestic swaps yesterday, they closed virtually unchanged ahead of today’s retail sales data. Overnight US bonds tested key resistance levels.

If the retail data comes in on the low-side as we expect, this may cause the market to ramp up RBNZ rate cut expectations. The market currently prices an 80% chance of a 25bps cut by mid next year.

For now, we are not convinced the RBNZ is on course to cut rates. We maintain a ‘pay on dips’ policy toward the bottom of fairly range-bound markets.

Overnight, the German ZEW survey defied hopes for a tick up. Both current conditions and forward-looking economic sentiment slipped.

German 10-year bond yields clung on around 1.34%, but remain not far off their July all-time lows (1.13%). US equivalents rebounded from their lows overnight to sit around 1.59% currently.

Still 10-year bonds remain perilously at key resistance levels. A break of these levels would open the way for a return to all-time lows on yield, below 1.40%.

Key data for US yields tonight will be advance retail sales. The Fed’s minutes from their October meeting will also be released tomorrow morning.

The Fed has clearly established its desire to keep monetary conditions loose until after the economic recovery takes hold, and to take further stimulus “if necessary”. Still, the market will dissect every word for nuance.

The Bank of England will also release its quarterly inflation report as a key pillar of its rate setting process. We suspect there may be some downward revisions to UK growth forecasts for the next few years, with the possibility of some uptick in inflation.

Also tonight, Italy will sell bonds. In the current relative calm of European debt markets this is expected to go without hitch. Italian 10-year bond yields currently sit below 5.0% compared to their late 2011 peak above 7.0%.