Eurozone yields rise as ECB's Nowotny plays down euro effect

[LONDON] Eurozone government bond yields rose across the board on Friday, reversing earlier falls, after one of the bloc's longest-standing policymakers played down the single currency's ability to derail the ECB's plan to withdraw stimulus.

Rate-setter Ewald Nowotny said he would not over-interpret or dramatise the euro's sharp rise against the US dollar.

Earlier in the session, south European bonds had outperformed their peers, after Reuters reported on Thursday that euro strength is worrying a growing number of policymakers at the European Central Bank.

But a combination of strong manufacturing data and Mr Nowotny's comments triggered a reversal of those early moves.

"The key point was that he (Nowotny) had a relatively sanguine view on currency strength, which challenges the concerns raised yesterday by some policymakers about the euro," said Richard McGuire, head of rates strategy at Rabobank.

He added the caveat that Mr Nowotny is one of the more hawkish members of the ECB Governing Council.

Eurozone manufacturing activity accelerated in August, clocking the fastest rise in export orders since February 2011 despite a strengthening currency, a business survey showed.

The yield on Germany's 10-year government bond yield, the benchmark for the region, was up two basis points at 0.38 per cent.

Italian and Spanish 10-year borrowing costs, meanwhile, having dropped three bps in early trade, were up two bps.

Some analysts warned that the outlook for inflation is still uncertain, given the strength of the single currency.

"Central banks don't have clarity about the future development of inflation," said DZ Bank strategist Daniel Lenz.

"We don't have a stable pattern at the moment; the ECB would want to have a very clear picture before tapering."

ECB Vice President Vitor Constancio said on Friday that lifting euro zone inflation may be more difficult than earlier expected.

Eurozone inflation rose more than expected in August, data showed on Thursday, but at 1.5 per cent was still well below the ECB target of just below two per cent.

The US Federal Reserve faces similar worries about the sustainability of inflation in the world's biggest economy, and the market will keep a close eye on US non-farm payroll numbers and the purchasing managers index data, both due out later in the day.

"If oil prices remain at the same levels, the negative base effect will kick in at the end of the year and headline inflation will drop again," said Mr Lenz.

Brent crude was 0.59 per cent lower at US$52.54 a barrel on Friday, yet to show any effect from Tropical Storm Harvey, which has affected the energy industry worldwide as flooded US refiners and closed fuel pipelines threatened to squeeze national supply.

US Treasury prices gained on Thursday after consumer spending data showed continuing low inflation; the core personal consumption expenditures (PCE) price index increased 1.4 per cent in the 12 months through July, the smallest year-on-year increase since December 2015.

REUTERS