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Markets scale back bets on ECB 2024 rate cuts to less than 100 bps


By Stefano Rebaudo

Feb 22 (Reuters)Euro zone bond yields edged lower after hitting multimonth highs, with investors scaling back bets on European Central Bank rate cuts as Federal Reserve minutes showed policymakers were concerned about easing monetary policy too early.

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.

Money markets earlier were pricing in up to 91 bps of rate cuts by December 2024 EURESTECBM7X8=ICAP on Thursday, compared with 130 bps in mid-February before U.S. inflation data and 150 bps early this month. They last discounted 98 bps.

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.

“The flash PMIs for February suggest that the economy is still struggling and that price pressures are, if anything, intensifying,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“This does not dramatically change the picture for the ECB, but it does mean that there is a growing chance that the ECB will wait until June,” he added.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, fell 0.5 basis points (bps) to 2.43%. It hit earlier in the session 2.5%, its highest level since Dec. 1.

U.S. Treasury prices edged higher after tumbling the day before, weighed down by a weaker-than-expected 20-year bond auction and the last Federal Reserve meeting minutes.

Bond yields move inversely with prices.

“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 EURESTECBM3X4=ICAP.

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 IT10YT=RR, the benchmark for the euro area’s periphery, briefly hit its highest since mid-December at 4.004% and was last down 2 bps at 3.93%.

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.

Dec24ESTR https://tmsnrt.rs/3wqIFJu

(Reporting by Stefano Rebaudo, editing by Angus MacSwan and Hugh Lawson)

((stefano.rebaudo@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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