Euro zone bond yields nudge higher amid ECB caution ahead of inflation data (updated)
26/08/2024 11:55
(Recasts lead, adds comments, background)
By Stefano Rebaudo and Sruthi Shankar
Aug 26 (Reuters) -
Euro area government bond yields edged up on Monday after
European Central Bank officials sounded cautious on future
monetary easing, with investors on hold ahead of key economic
data later this week.
The bloc's borrowing costs slipped on Friday after
Federal Reserve Chair Jerome Powell said the U.S. central bank
would
support
a strong labour market, strengthening expectations for a
super-sized 50 basis points (bps) rate cut next month.
Investors are awaiting euro zone inflation figures on
Friday after the release of data from Italy and France. Germany
and Spain will publish their data on Thursday.
German
business morale
fell to 86.6 in August, with analysts polled by Reuters
expecting 86.0.
Germany's 10-year bond yield DE10YT=RR , the benchmark
for the euro zone bloc, rose 0.5 basis points to 2.23%, after
dropping 2 bps on Friday.
Traders have been fully pricing 25 bps from the Fed in
September for weeks and increased bets on 50 bps to 39% from 24%
after Powell remarks. FEDWATCH
Analysts said the scope for a major repricing in bond yields
is limited before the August employment report, due on September
6, as Powell's speech at Jackson Hole shifted the focus from
upside inflation risks to downside labour market risks.
"Employment reports will be of particular importance in
shaping the policy trajectory," said David Doyle, head of
economics at Macquarie, which forecasts successive cuts of 25
bps in September, November, and December meetings.
ECB CAUTION
Meanwhile, ECB chief economist Philip Lane struck a more
cautious note than the Fed, saying the central bank is making
"good progress" in cutting inflation back to its 2% target but
could still need a restrictive monetary policy.
Analysts also flagged that governing council member Robert
Holzmann, seen as a hawk, warned that the ECB might not lower
rates next month.
Market participants label as hawks central bank officials
who advocate a tight monetary policy to control inflation, while
doves focus more on economic growth and the labour market.
Traders are also keeping an eye on a fresh spike in tensions
in the Middle East after Iran-backed Hezbollah launched hundreds
of rockets and drones at Israel in one of the biggest clashes in
more than ten months of border warfare.
A report from Citi underscored that if the Middle East
conflict were to broaden and impair global oil supply, it would
act as a negative supply shock for the global economy, lowering
growth, boosting inflation, and creating new headaches for
central banks.
However, other issues concerning investors include tensions
between the U.S. and China, shifts in global supply chains, and
the rising prominence of populist voices.
Italy's 10-year yield IT10YT=RR , the benchmark for the
euro area periphery, was up 1.5 bps at 3.58%, and the gap
between Italian and German bunds DE10IT10=RR stood at 134 bps.
(Reporting by Stefano Rebaudo and Sruthi Shankar; Editing by
Gareth Jones)
((stefano.rebaudo@tr.com))