Euro area government bond yields dropped while markets slightly increased their bets on future rate cuts in a week packed with central bank policy meetings and crucial economic data.
Some analysts reckoned that soft economic growth and inflation figures from the euro zone, due from Wednesday, could add to expectations for European Central Bank future rate cuts.
U.S. Federal Reserve’s Federal Open Market Committee (FOMC) will announce its decision on Wednesday at 1900 GMT.
The Fed will wait until the second quarter before cutting rates, according to a Reuters poll, with the timing seen as in June rather than May, but traders are pricing an around 50% chance of a March move, according to CME Group’s FedWatch Tool.
Germany’s 10-year bond yields, the benchmark for the euro area, dropped 4 basis points (bps) to 2.26%.
“We are expecting GDP data to confirm the euro area is in recession, while we think the inflation data will print to the downside versus consensus on both headline and core inflation,” said George Buckley, chief UK and euro area economist at Nomura.
ECB euro short-term rate (ESTR) forwards priced in 146 bps of rate cuts in 2024 from around 140 bps late on Friday.
“Together with the open-minded ECB rhetoric, this (a likely decline in inflation and growth data) adds conviction to the aggressive depo (rate) path discounted by (ECB) ESTR-forwards,” said Rainer Guntermann, rate strategist at Commerzbank.
Last week, euro area yields dropped, and markets increased their bets on future cuts as ECB president Christine Lagarde struck a slightly dovish tone at the press conference following the policy meeting.
Italy’s 10-year bond yield fell 3 bps to 3.80%. The gap between Italian and German 10-year bond yields was at 152 after hitting 149.3 basis points last week, the lowest since April 1, 2022.
Analysts argued that a gradual phasing out of the Pandemic Emergency Purchase Programme (PEPP) reinvestments the ECB announced in mid-December supported bonds of the most indebted countries. Bond prices move inversely with yields.
The Italian-German yield spread dropped from 185 bps on Dec. 14 to around 150 bps late last week, while the market pricing of 2024 rate cuts was little changed from 150 to around 145 bps.
ECB speakers, including Vice President Luis de Guindos and governing council member Klaas Knot, didn’t deliver fresh clues about the monetary path.
The Bank of England (BoE) publishes meeting minutes after the rate decision on Thursday at 1200 GMT; Riksbank will announce its monetary policy decision the same day at 0830 GMT.
Citi economists expect the BoE to reaffirm the risk of persistent inflation and the likelihood that rates will remain restrictive for some time after leaving them unchanged.
They also see Riksbank not taking action on rates while pushing back against pricing of early cuts.
(Reporting by Stefano Rebaudo; Editing by Bernadette Baum)
