Eurozone yields edge up after Fed's Powell remarks
EUROZONE government bond yields rose slightly after Federal Reserve Chair Jerome Powell said the Fed’s fight to lower inflation to its 2 per cent target “has a long way to go.”
Powell’s comments came in testimony prepared for an appearance at the House Financial Services Committee. Markets had already priced in a 25 bps raise next month.
Analysts said they did not expect Powell to divert significantly in his appearance what he said in the press conference after last week’s Fed policy meeting, reiterating central bank’s decisions will be data-dependent.
US Fed Chair and nominees for three Fed Board seats will testify on Capitol Hill on Wednesday (Jun 21), laying out over several hours of hearings.
Short-dated yields hit new highs and market bets on policy rates rose to 4 per cent earlier in the session as data from Britain was a stark reminder that the fight against inflation is not over and central banks might need to tighten further.
Germany’s 10-year government bond yield, the euro area’s benchmark, rose 2.5 basis points (bps) to 2.43 per cent.
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British consumer price inflation was higher than expected in May, leading investors to ramp up their bets on the Bank of England’s next moves on rates.
“Being specific to the UK economy – and reflecting the tightness of the labour market – are the strong wage growth numbers,” said Gero Jung, chief economist at Mirabaud AM.
“Between February and April, average earnings grew at a near record pace of 7.2 per cent (annualised) – signalling that there are likely strong effects from a wage-price spiral,” he added.
Euro area short-dated yields have climbed towards levels seen before fears of a banking crisis disrupted financial markets in March, sending market bets on where policy rates would peak to around 3 per cent.
Germany’s 2-year bond yield, the most sensitive to policy rates expectations, rose to its highest since March 10 at 3.235 per cent. It was last up 2.5 bps at 3.18 per cent. It hit its highest level since October 2008 at 3.385 per cent on March 9.
December 2023 forwards on European Central Bank (ECB) euro short-term rate (ESTR) was at 3.9 per cent, implying market expectations for an ECB depo rate at 4 per cent by year-end.
Analysts said that Bank of France Governor Francois Villeroy de Galhau said on Tuesday the ECB has completed most of its interest rate increases, and possible further hikes would be less critical in fighting inflation than the duration of tight monetary policy.
They also recalled Lithuanian policymaker Gediminas Simkus stating on Tuesday what markets have been pricing since the ECB policy meeting last week, that a rate hike in September wouldn’t be a surprise.
Italy’s 10-year bond yield, the benchmark of the periphery, rose 3 bps to 4.06 per cent, with the spread between Italian and German 10-year yields at 162 bps after hitting last week its tightest level since April 1 below 150 bps. REUTERS
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