European bond yields push higher from stronger than expected PMIs, hawkish ECB commentary and prospect of increased German bond supply as the government looks to suspend the "debt brake". Other markets quiet

Markets are quiet, with the US on holiday but European bond yields have pushed higher, with slightly better than expected PMIs, a backdrop of hawkish ECB commentary and Germany suspending its debt limit all in the mix. Currency movements have been modest overnight, and the NZD has held onto its small gain seen during local trading hours and currently sits around 0.6050.

Early November readings for PMI data in Europe and UK showed a broad-based lift in activity from October and were higher than expected across the board. However, for the euro area the composite reading of 47.1 was the sixth month in a row below 50, signalling another possible fall in GDP for the quarter, which would put the economy in shallow-recession territory. For the UK, the key services index pushed above the 50-mark, taking it and the composite index to a four-month high and raising the chance that the economy expanded slightly in Q4.

Germany signalled that it would suspend the “debt brake” on government financing, following last week’s Constitutional court ruling that it couldn’t use €60b earmarked to tackle the COVID19 pandemic into an off-budget fund to tackle climate change. The ruling also likely affects the use of other off-budget vehicles.

The implication is that the government will be borrowing more money, and the prospect of more bond supply added upside pressure to German bond yields, which were already heading higher following the slightly stronger than expected PMI data. Germany’s 10-year rate is up 6bps to 2.62% while the UK 10-year rate is up 10bps to 4.26%. The US Treasuries market is closed but the 10-year future implies about a 4bps lift in yield to 4.44%.

Not helping the mood for European bond markets, ECB hawks Wunsch and Nagel have been reiterating their views that the ECB’s job on rate hikes might not yet be done. The ECB minutes of its last meeting didn’t throw up any surprises, but reminded the market that a tightening bias remained in place and the Governing Council recognised the need to avoid “unwarranted loosening of financial conditions”.

Going against the consensus view that Sweden’s Riksbank would hike rates, the central bank left its policy rate at 4.0%, against the backdrop of a weakening economy and inflation pressures. The Bank maintained a hawkish bias, but SEK has underperformed overnight, falling 0.5%.

Net currency moves have been modest. GBP has been the best performer, up 0.2% overnight to 1.2530. EUR is flat at 1.09. The NZD found some support during local trading hours, on the back of CNY tailwinds, as the PBoC continues to fix the CNY reference rate on the strong side of the ledger, not deterred by its recent recovery. Some resistance for the NZD was met around 0.6065 and it currently trades near 0.6050. The AUD is also modestly stronger, at 0.6560, with NZD/AUD range trading around 0.9220. The higher global rates backdrop has driven some yen underperformance, seeing NZD/JPY back above 90.

In equity markets, the Euro Stoxx 600 index closed 0.3% higher while US S&P 500 futures are flat.

In the domestic rates markets, strong demand for NZ bonds continues to be evident, with another solid weekly tender. Bid-cover ratios were high across all lines, particularly for the longer maturities on offer. Against a backdrop of higher global rates, the 10-year NZGB closed the day unchanged at 4.92%. There was some notable curve flattening, with the 5-year rate up 5bps, while the ultra-long bonds fell 1bp. The swaps curve also flattened, with the 2-year rate up 7bps to 5.21% and the 10-year rate up 2bps to 4.78%.

On the calendar, NZ retail sales volumes for Q3 will be released, where the consensus sees yet another contraction, which would make it the sixth fall out of the past seven quarters. Global releases include Japan CPI, Germany’s IFO survey of businesses and US PMIs.