Emerging markets buffer themselves from the ill-effects of the European crisis

by Kymberly Martin

There was not a lot going on in NZ markets yesterday. Yields closed a little higher, with the swap curve slightly steeper.

The yield on 2-year swaps lingers at 2.82%, while 10-year yields have risen to 4.08%.

Bond yields rose around 2bps across the curve, taking the yield on 21s to 3.91%.

The yield on inflation-linked NZGB16s appears to be stabilising around 1.20%. This comes after its step jump up from 1.00% on last week’s low-side inflation surprise.

Overnight, markets were relatively subdued as negotiations in the Greek bond restructuring stalled. US 10-year yields are still bumping up against the top of their recent range, now around 2.06%. The yield on German equivalents is flirting with breaking above 2.0%.

In a surprise move, the Indian central bank cut the cash reserve ratio for banks by 0.5% to 5.5%. This illustrates that emerging markets stand ready to buffer themselves from the ill-effects of the European crisis, if necessary. Up until October last year, India had still been raising its main policy rate to head-off inflationary pressures.

Today, Australian CPI data will give some colour on its inflation picture. The market expects a downshift from 0.6%q/q to 0.2%q/q. This will still keep the y/y rate at 3.3%.

Early tomorrow morning the US FOMC will announce rates. This will be closely watched for the committee’s new communication mechanism. Given the market expects little tightening before 2014 it will be hard for the Fed to surprise on the downside with respect to its expected interest rate track. However, the Fed will likely still talk about considering more asset purchases “if necessary”.

NZ credit card billings, as the only local data today, are unlikely to greatly impact the local market.