Euro zone bond yields nudge higher amid ECB caution ahead of inflation data

Scope for a major repricing in bond yields is limited before the August employment report

By Reuters

Top Stories

UAE announces 2-month grace period for residence visa violators

UAE announces fee refund for tax service charges from August 1

Paid parking in Dubai: Residents face up to Dh4,000 extra yearly costs when new rates kick in

EU flags flutter in front of European Central Bank (ECB) headquarters in Frankfurt, Germany. — Reuters file

Published: Mon 26 Aug 2024, 3:31 PM

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, the benchmark for the euro zone bloc, rose 0.5 basis points to 2.23 per cent, 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 per cent from 24 per cent after Powell remarks.

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 per cent 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, the benchmark for the euro area periphery, was up 1.5 bps at 3.58 per cent, and the gap between Italian and German bunds stood at 134 bps.