Eurozone performance: Euro zone government bond yields rose on Monday after European Central Bank officials sounded cautious about future monetary easing, while investors waited for key economic data later this week.
The bloc’s borrowing costs slipped on Friday after Federal Reserve Chairman Jerome Powell said the U.S. central bank support a strong labor market, which strengthens expectations of a large 50 basis point (bp) rate cut next month.
Investors are awaiting inflation data from the Eurozone on Friday, following the publication of those from Italy and France. Germany and Spain will publish their figures on Thursday.
German corporate morality fell to 86.6 in August, while analysts polled by Reuters had expected 86.0.
The yield on German 10-year bonds DE10YT=RR, the benchmark for the euro zone bloc, rose 2 basis points to 2.24 percent, after falling 2 basis points on Friday.
Traders have been fully pricing in a 25 basis point Fed hike in September for weeks and raised bets to 50 basis points to 39 percent from 24 percent after Powell’s comments.
Analysts said scope for a significant rally in bond yields is limited ahead of the August jobs report on Sept. 6 as Powell’s speech at Jackson Hole shifted the focus from upside inflation risks to downside labor market risks.
“Employment reports will be particularly important in shaping the path of policy,” said David Doyle, head of economics at Macquarie, who forecasts successive 25 basis point cuts at meetings in September, November and December.
ECB CAUTION
Meanwhile, ECB chief economist Philip lane The U.S. Treasury Secretary took a more cautious stance than the Fed, saying the central bank was making “good progress” in bringing inflation down to its 2 percent target but may still need to tighten monetary policy.
Analysts also noted that governing council member Robert Holzmann, considered a hawk, warned that the ECB might not cut rates next month.
Market participants are labeled as hawks and central bankers who advocate tight monetary policy to control inflation, while doves focus more on economic growth and the labor market.
Markets have barely budged on bets on ECB rate cuts since Friday, at around 65 basis points in 2024. EURESTECBM3X4=ICAP
Traders are also on the lookout for a further rise in tensions in the Middle East after Iran backed Hezbollah Hundreds of rockets and drones were fired at Israel in one of the biggest clashes in more than 10 months of border war.
A Citi report stressed that if the Middle East conflict were to widen and hurt global oil supplies, it would act as a negative supply shock to the global economy, reducing growth, boosting inflation and creating new headaches for central banks.
However, other issues that concern investors include tensions between the United States and China, changes in global supply chains and the growing prominence of populist voices.
Italian 10-year bond yields IT10YT=RR, the benchmark for the euro zone periphery, rose 2.5 basis points to 3.59 percent, and the gap between German and Italian bonds stood at 134 basis points.
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