Growing speculation ECB will eventually be forced to purchase sovereign bonds; German inflation slides meaning eurozone inflation could be close to 0%

By Raiko Shareef

NZ interest rates continued to take their cues from offshore, dipping lower after Treasuries rallied on Wednesday night.

The local 2-year swap yield dipped 1bp to 3.88%, and the curve continued to flatten. The difference between the 10- and 2-year swap yield fell to 47.5bps.

US markets were closed for the Thanksgiving holiday. European bond yields continue to grind lower, as speculation grows that the ECB will eventually be forced to purchase sovereign bonds.

That line of thinking was given succour by the (anticipated) slide lower in German inflation. There, the annual pace of inflation dropped from 0.7% y/y to 0.5% in November, in line with expectations. That will likely see euro-zone inflation (due tonight) drop back to 0.3%, matching the cyclical low hit in August and September.

With an inflation target of 2.0%, the ECB is under increasing pressure to boost inflation. The collapse in oil price over the past few months will only make this more challenging.

Aside from the euro-zone inflation reading, the data calendar is very light. Canada’s GDP report might attract attention, but it should be a light trading session, with the US investment community likely taking Friday off.