Euro zone government bond yields rise before ECB policy meeting
Euro zone government bond yields rose on Thursday after falling the day before, with investors expecting the European Central Bank to cut rates by 25 basis points later in the session while focusing on possible clues about the rate path.
Markets will want to see if the ECB maintains a reference to rates being restrictive, as such a phrase would signal that more policy easing remains the baseline. They will also be looking for any updates on the impact of trade barriers.
Germany's 10-year yield, the euro area's benchmark, rose 5.5 basis points (bps) to 2.51% after falling 4 bps the day before.
"The potential upward shock to growth of (German chancellor-in-waiting Friedrich) Merz's plan and the supply constraints of tariffs suggest the ECB should maintain rates in tight to neutral territories," said Kevin Thozet, a member of the investment committee at Carmignac.
Germany's new coalition government recently unveiled economic and tax reforms aimed at bringing Europe's largest economy back to growth.
"However, the reality is the pain induced by lower household and corporate confidence induced by (U.S. President Donald) Trump, and (White House trade adviser Peter) Navarro policies will be felt first," he added, arguing that such a backdrop calls for further steepening of the European yield curve.
Trump said there was "big progress" in preliminary talks with a Japanese trade delegation in Washington about the barrage of tariffs he has imposed.
Analysts expect the yield curve to steepen further, with long-term yields climbing while short-term rates stay linked to what markets anticipate from the ECB.
Germany's 2-year yield, more sensitive to expectations for ECB policy rates, rose 5.5 bps to 1.80%.
U.S. Treasury yields rose in London trade, with the benchmark 10-year yield up 3.5 bps after falling 4.5 bps the day before as Federal Reserve Chair Jerome Powell's comments stoked concerns about economic growth and inflation.
Italian bond yields were up 2.5 bps at 3.72%, with the gap between Italian and German yields -- a market gauge of the risk premium investors demand to hold Italian debt -- at 118 bps. Last week, credit rating agency S&P upgraded Italy's long-term ratings to "BBB+" from "BBB".
Market pricing for the ECB rate path remained roughly unchanged this week as concerns about the adverse economic impact of U.S. tariffs stalled.
Investors are pricing the ECB deposit rate at 1.68% by December, implying three rate cuts from the current 2.5% and about a 30% chance of a fourth easing move.
(Reporting by Stefano Rebaudo, editing by Ed Osmond)
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Khaleej Times
32 minutes ago
- Khaleej Times
Iran says no sanctions relief in US nuclear proposal
Iran's parliament speaker said on Sunday that the latest US proposal for a nuclear deal does not include the lifting of sanctions, state media reported as negotiations appear to have hit a roadblock. The two foes have held five rounds of Omani-mediated talks since April, seeking to replace a landmark agreement between Tehran and world powers that set restrictions on Iran's nuclear activities in return for sanctions relief, before US President Donald Trump abandoned the accord during his first term in 2018. In a video aired on Iranian state TV, parliament speaker Mohammad Bagher Ghalibaf said that "the US plan does not even mention the lifting of sanctions". He called it a sign of dishonesty, accusing the Americans of seeking to impose a "unilateral" agreement that Tehran would not accept. "The delusional US president should know better and change his approach if he is really looking for a deal," Ghalibaf said. On May 31, after the fifth round of talks, Iran said it had received "elements" of a US proposal, with officials later taking issue with "ambiguities" in the draft text. The US and its Western allies have long accused the Islamic republic of seeking to acquire nuclear weapons, a charge Iran has consistently denied, insisting that its atomic programme was solely for peaceful purposes. Key issues in the negotiations have been the removal of biting economic sanctions and uranium enrichment. Tehran says it has the right to enrich uranium under the nuclear Non-Proliferation Treaty, while the Trump administration has called any Iranian enrichment a "red line". Trump, who has revived his "maximum pressure" campaign of sanction on Iran since taking office in January, has repeatedly said it will not be allowed any uranium enrichment under a potential deal. On Tuesday, Iran's top negotiator, Foreign Minister Abbas Araghchi, said the country "will not ask anyone for permission to continue enriching uranium". According to the UN nuclear watchdog, the International Atomic Energy Agency (IAEA), Iran is the only non-nuclear-weapon state in the world that enriches uranium up to 60 percent -- still short of the 90 percent threshold needed for a nuclear warhead. Iran's supreme leader Ayatollah Ali Khamenei on Wednesday rejected the latest US proposal and said enrichment was "key" to Iran's nuclear programme. The IAEA Board of Governors is scheduled to meet in Vienna later this month and discuss Iran's nuclear activities.
Gulf Today
3 hours ago
- Gulf Today
Weekly jobless claims hit 7-month high; imports post record decline
The number of Americans filing new applications for unemployment benefits increased to a seven-month high last week, pointing to softening labour market conditions amid mounting economic headwinds from tariffs. The report from the labour Department also continued to show workers losing their jobs having a tough time landing new opportunities as uncertainty caused by President Donald Trump's aggressive trade policy leaves employers reluctant to increase headcount. The data included the Memorial Day holiday, which economists said could have caused difficulties with the seasonal adjustment and likely contributed to the second straight weekly increase in unemployment claims. Still, they said the report offered some evidence of labour market strains. 'We won't dismiss the rise in claims over the last two weeks, which may be signaling weakening labour market conditions in response to the Trump administration's tariff policies and uncertainty,' said Nancy Vanden Houten, lead US economist at Oxford Economics. 'However, seasonal quirks might have contributed to the rise in claims.' Initial claims for state unemployment benefits rose 8,000 to a seasonally adjusted 247,000 for the week ended May 31, the highest level since last October. Economists polled by Reuters had forecast 235,000 claims for the latest week. With the start of the school holidays this month, claims could remain elevated as some states allow non-teaching staff to collect benefits. There were notable rises in unadjusted claims in Kentucky and Tennessee, likely related to layoffs in the motor vehicle industry amid duties on imported parts. Claims surged in the prior week in Michigan, attributed to layoffs in the manufacturing industry. But companies are generally hoarding workers after struggling to find labour during and after the COVID-19 pandemic. The Federal Reserve's Beige Book report on Wednesday showed 'comments about uncertainty delaying hiring were widespread,' noting that 'all districts described lower labour demand, citing declining hours worked and overtime, hiring pauses and staff reduction plans.' It said while some districts reported layoffs in certain sectors, 'these layoffs were not pervasive.' Stocks on Wall Street were higher. The dollar was steady against a basket of currencies. US Treasury yields rose. The number of people receiving benefits after an initial week of aid, a proxy for hiring, slipped 3,000 to a seasonally adjusted 1.904 million during the week ending May 24, the claims report showed. The elevation in the so-called continuing claims aligns with consumers' ebbing confidence in the labour market. SLACKENING labour MARKET The claims data have no bearing on the labour Department's closely watched employment report for May, scheduled to be released on Friday, as it falls outside the survey period. Nonfarm payrolls likely increased by 130,000 jobs last month after advancing by 177,000 in April, a Reuters survey of economists showed. The unemployment rate is forecast being unchanged at 4.2%. 'A gradual but genuine slackening of the labour market is underway,' said Oliver Allen, senior US economist at Pantheon Macroeconomics. There was, however, some welcome news on the economy. A separate report from the Commerce Department's Bureau of Economic Analysis showed the trade deficit narrowed sharply in April, with imports decreasing by the most on record as the front-running of goods ahead of tariffs ebbed, which could provide a lift to economic growth this quarter. The trade gap contracted by a record 55.5% to $61.6 billion, the lowest level since September 2023. The goods trade deficit eased by a record 46.2% to $87.4 billion, the lowest level since October 2023. A rush to beat import duties helped to widen the trade deficit in the first quarter, which accounted for a large part of the 0.2% annualized rate of decline in gross domestic product last quarter. The contraction in the deficit, at face value, suggests that trade could significantly add to GDP this quarter, but much would depend on the state of inventories. 'The collapse in the trade gap, although unlikely to be sustained, points to a massive trade addition to GDP growth and, if the offset to the import swing is not measured in inventories, second-quarter measured GDP growth could be eye-popping, possibly in the area of 5%, but as meaningless as the first-quarter's decline in output,' said Conrad DeQuadros, senior economic advisor at Brean Capital. Imports decreased by a record 16.3% to $351.0 billion in April. Goods imports slumped by a record 19.9% to $277.9 billion, held down by a $33.0 billion decline in consumer goods, mostly pharmaceutical preparations from Ireland. Agencies
Khaleej Times
4 hours ago
- Khaleej Times
ECB should not 'overreact' if inflation edges below 2%, Vujcic says
The European Central Bank should not "overreact" to euro zone inflation edging below its 2% target as there are good reasons to believe it will come back up, ECB policymaker Boris Vujcic told Reuters. The ECB cut interest rates on Thursday for the eighth time in a year but signalled at least a policy pause next month, despite projecting inflation at just 1.6% next year. Inflation in the 20 countries that share the euro was 1.9% in May, according to a flash reading published last week. Vujcic, who is also Croatia's central bank governor, said price growth was likely to bounce back later and that monetary policy should not try to do "precision surgery" on small fluctuations from its goal. "A few tens of basis points' deviation on either side of the target is not a problem," Vujcic said in an interview on Saturday in Dubrovnik. "Because you will always have small deviations. If you consider them as a problem, then you will overreact. This is not precision surgery." Vujcic said it was reasonable to expect inflation to edge back up as energy prices find a bottom and the economy accelerates. Euro strength is also unlikely to have second-round effects on prices unless it lasts several quarters, Vujcic said. Some ECB policymakers, especially Portugal's central bank governor Mario Centeno, worry that euro-zone inflation may slow too much. Vujcic said he sees the risks surrounding the inflation outlook as "pretty balanced" but cautioned there was "complete uncertainty" surrounding global trade tensions with U.S. President Donald Trump's administration. ECB strategy review Vujcic recalled advice he received as a young deputy governor from then-Federal Reserve Chair Alan Greenspan: a high rate of inflation was more dangerous than a low one. Greenspan cited two decades of relatively benign deflation in the late 19th century, which was partly due to improvements in productivity, Vujcic said. "Nobody cared about low inflation because of the productivity growth," he said. "You have a monetary policy problem to bring it up. Yes, but why would you insist so much if you don't have a problem in the economy?" The ECB is reviewing its long-term strategy, including the role of massive bond purchases, or quantitative easing, in reviving inflation when it is too low. The ECB injected some 7 trillion euros ($8 trillion) of liquidity into the banking system through QE and other tools over the past decade. These schemes were blamed for inflating bubbles in real estate and setting up the central bank for sizeable losses. "The next time around, people will take the lessons from the previous episode, and I think that the bar for QE would be higher," Vujcic said. He said QE could help stabilise dysfunctional markets - such as during the 2008 financial crisis and the COVID-19 pandemic - but if used "for years and years to try and bring inflation up, its marginal efficiency declines". Such calls for self-criticism are shared by some policymakers in the ECB's hawkish camp. But sources told Reuters they were unlikely to feature in the ECB's new strategy document, to be published this summer.
