By Kymberly Martin
NZ swaps closed up 2bps across the curve yesterday. The market now prices around a 90% chance of an RBNZ cut by mid next year.
It prices a 20% chance of a cut at the Dec 6 meeting. We do not expect a cut. But we believe the tone of the statement will be more dovish by virtue of acknowledging Q3 data softness and the lower starting point for inflation.
Yesterday’s RBA minutes showed that ‘”members considered that further easing may be appropriate in the period ahead”. Referencing one of the key areas of concern the minutes highlighted that “conditions in the mining sector had declined since earlier in the year”. However, market expectations for a cut at the Dec 4 meeting are little changed. The market prices a 60% probability.
AU bond yields initial dipped following the release of the minutes. Later in the day bonds sold-off dragging their NZ counterparts with them. NZ bond yields closed up 3-4bps across the curve. NZ 10-year bonds now sit around 25bps above their all-time lows achieved in late July.
Yesterday, rating agency Moody’s downgraded France’s sovereign rating one notch to Aa1 from Aaa. This only brings it in line with S&P’s rating. However, the European Financial Stability Facility (EFSF) was forced to delay an auction of its bonds due to France’s downgrade undermining the guarantee on the bonds.
Elsewhere in Europe, ‘safe-haven’ German bonds sold-off and peripheral European spreads narrowed. The market appears hopeful that Greece will secure its next aid tranche from the current Eurozone Finance Minister’s meeting.
Still, while the proposed 2-year fix may calm immediate fears, discussions at the meeting will also focus on finding an elusive path for long-term debt sustainability. In the interim, German 10-year bond yields have risen from 1.34% to 1.42%.
US housing data surprised positively early this morning. Housing starts rose 3.6%m/m in October (-3.7% expected). This helped underpin a rise in US 10-year yields from 1.60% to 1.65%.
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