Euro zone yields climbed, and money markets adjusted their expectations for future rate cuts on Monday. This shift followed robust U.S. data and statements from Federal Reserve Chair Jerome Powell, reinforcing the belief that central banks may not need to implement policy easing hastily.
Investors responded to an unexpected surge in U.S. job growth by selling sovereign bonds on both sides of the Atlantic last Friday. The bond market reassessment quickly unfolded, influencing predictions for the number of rate cuts major central banks might undertake in 2024. Notably, bond prices move inversely with yields.
In an interview aired on Sunday, Powell emphasized the Fed’s ability to be “prudent” in determining when to cut its benchmark interest rate. He cited a strong economy, giving central bankers the time needed to gain confidence in the sustained decline of inflation.
Market participants anticipate that the European Central Bank (ECB) will exercise patience before considering any relaxation of monetary policy, despite weak economic data. Rohan Khanna, Head of Euro Rate Strategy at Barclays, noted that central banks are currently in risk-management mode and willing to be patient. He suggested that while recent data might support the Fed’s wait-and-see approach, the same may not be as evident for the ECB, questioning the accuracy of its growth and inflation projections.
Germany, a key player in the euro zone, faced challenges as its exports fell more than anticipated in December due to weak global demand. The 10-year government bond yield, serving as the benchmark for the euro zone, increased by 5 basis points to 2.28%.
The Ifo Institute highlighted the burden on the German economy caused by a lack of orders in manufacturing. Meanwhile, the ECB euro-short-term rate (ESTR) forwards adjusted to reflect reduced expectations, pricing in approximately 125 basis points of rate cuts by year-end. This is down from 138 basis points before the U.S. data release on Friday and significantly lower than the around 175 basis points recorded at the end of the previous year.
Investors are keeping a close eye on the ECB consumer expectations survey scheduled for Tuesday. Any further decline in the 3-year consumer inflation expectations, currently at 2.2%, could bring the measure back to levels observed before the conflict in Ukraine.
Italy experienced a 5 basis points rise in its 10-year government bond yield, reaching 3.85%. The yield gap between Italian and German 10-year yields widened to 156 basis points, contrasting with its lowest level since April 2023, recorded at 146 basis points early last week.
