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Draghi goes out of his way to say the ECB isn't done yet with monetary accommodation. US markets have more than one Fed hike priced in as housing markest improve

Bonds
Draghi goes out of his way to say the ECB isn't done yet with monetary accommodation. US markets have more than one Fed hike priced in as housing markest improve

By Jason Wong

The theme this week continues to be a pause in the big bond selloff that has been underway over recent months, and which gained traction after Trump's election victory.

Global yields are slightly lower overnight, led by Europe.

After our report went to press yesterday, ECB President Draghi said that the central bank is “committed to preserving the very substantial degree of monetary accommodation necessary to secure a sustained convergence of inflation” toward the target. This followed comments from other Governing Council members Coeure and Villerory de Galhau, who signalled that the time to taper QE had not yet arrived. The market is sensitive to any possible taper comments ahead of the next ECB meeting in early December. These comments supported German bunds, with the 10-rate down 4 bps to 0.23% and this has fed through into European markets.

The US Treasury curve flattened a little, with the 10-year rate down 2 bps at 2.30% and the 2-year rate up 1bps to 1.08%. There were few economic releases to digest. The only one of note was the 2% rise in existing home sales, to reach their highest level since 2007. So the housing market has good momentum, but the circa 50 bps rise in 30-year mortgage rates since the US election throws some caution into the wind about the outlook from here. Indeed, a decline in mortgage applications, evident even before the election, signals downside pressure to the US housing market.

Market-based expectations for a Fed hike next month are sitting between 94%-100%, depending on how they are measured, meaning a rate hike is all but a sure thing. Following that, the OIS market has priced in another 38 bps of hikes for next year. This is below the two rate hikes the FOMC signaled as per the last set of “dot-plots” and since then the inflation outlook looks stronger post the US election. That provides some further upside potential in US bond yields at some stage, particularly at the shorter end of the curve.

Global forces supported the NZ rates market yesterday, with the 2-year swap rate down 1.5 bps to 2.25% and the 10-year rate down 4.5 bps to 3.225%. The short end of the curve should continue to be underpinned by little change in monetary policy expectations over coming months. We're in line with the consensus, believing that the OCR will remain unchanged throughout 2017. RBNZ's Bascand's speech last night was a fairly academic one on household spending/saving dynamics to an academic audience with little market implication.

Daily swap rates

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Jason Wong is on the BNZ Research team. All its research is available here.

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