Markets scale back bets on ECB 2024 rate cuts to less than 100 bps after Fed, PMI
By Stefano Rebaudo
Feb 22 (Reuters) – Euro zone yields hit multi-month highs on Thursday and money markets scaled back their bets on future European Central Bank rate cuts to less than 100 bps in 2024 after Federal Reserve minutes showed policymakers were concerned about easing monetary policy too early.
Data from purchasing managers’ indexes delivered mixed signals with the economic downturn deepening in Germany while the slowdown in French business activity eased considerably.
The downturn in the euro zone eased as the dominant services sector broke a six-month streak of contraction.
Since early February, central bank officials on both sides of the Atlantic have sounded cautious about a quick reduction of policy rates, while recent economic data supported expectations that the battle against inflation was not over yet.
Germany’s 10-year government bond yield, the euro area’s benchmark, rose 3.5 basis points (bps) to 2.47%. It hit earlier in the session 2.5%, its highest level since Dec. 1.
Money markets priced in 95 bps of rate cuts by December 2024 from 130 bps in mid-February before U.S. inflation data and from 150 bps early this month.
U.S. Treasury prices tumbled, pushing yields higher on Wednesday, weighed down by a weaker-than-expected 20-year bond auction and the last Federal Reserve meeting minutes.
“Concerns that the Federal Reserve could cut rates after the summer and not in June are weighing on bond prices in the U.S. and the euro area,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.
Allianz Global Investors’ base case is for a first move by the Fed in June.
“The ECB can delay too if wages keep growing and inflation is stickier than expected,” Maxia added.
Money markets fully price a first ECB rate cut by 25 bps in June.
The ECB policy accounts, due later in the session, will also be in the spotlight as they could shed light on the softening wage data mentioned by ECB president Christine Lagarde during the press conference.
Italy’s 10-year government bond yield, the benchmark for the euro area’s periphery, briefly hit its highest since mid-December at 4.004% and was last up 2 bps at 3.97%.
The gap between Italian and German 10-year yields – a gauge of risk premium investors ask to hold debt of the euro area’s most indebted countries – hit a 23-month low at 145.3 bps. It was last at 148 bps.
Analysts said Italian paper remains well supported, given that it has more appealing returns than other euro zone bonds, while investors don’t see significant threats to the Italian macroeconomic and political environment in the short term.
(Reporting by Stefano Rebaudo, editing by Angus MacSwan) ;))
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