Eurozone yields edge down after weak data from France, Germany

EUROZONE yields fell on Tuesday (Jan 31) after economic data revived fears of a marked slowdown, while investors braced for a rate hike of 50 basis points (bps) and possibly further hawkish guidance at the European Central Bank (ECB) policy meeting.

France managed to eke out meagre growth in the final quarter of 2022, while German retail sales unexpectedly fell.

Joost van Leenders, senior investment strategist at Van Lanschot Kempen, said: “Economic data from Germany and France showing a slowdown in the European economy are affecting bond prices.”

“Markets expect the ECB to hike rates by 50 bps twice by March, while there is more uncertainty about what will happen then,” he added.

Germany’s 10-year government bond yield, the benchmark of the bloc, fell 3.5 bps to 2.3 per cent. On Jan 18, it hit its lowest in a month, at 2 per cent. Earlier, on Dec 30, 2022, it reached its highest since July 2011, at 2.6 per cent.

Berenberg economist Holger Schmieding said: “In line with the ECB’s recent ‘higher for longer’ mantra, ECB president Christine Lagarde will likely push back against market expectations that the bank will start cutting rates again late this year or in early 2024.”

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The ECB’s euro short-term rate (ESTR) forwards implied that the deposit rate would peak at 3.5 per cent in the middle of this year. Before the release of Spain’s inflation numbers on Monday, traders were betting that rates would peak at around 3.3 per cent.

Published by the ECB, the ESTR reflects the wholesale euro unsecured overnight borrowing costs of banks in the euro area. The rate is usually around 10 bps below the deposit rate.

Economists polled by Reuters expected the ECB to deliver a rate hike of 50 bps at its policy meeting on Thursday. They also expected the rate hikes to stop when the deposit rate reaches 3.3 per cent next quarter.

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Spain’s inflation rate was at 5.8 per cent in January, up from 5.5 per cent in December 2022, and exceeding the 4.7 per cent estimate by analysts in a Reuters poll. France’s inflation rate also rose to 7 per cent in January, from 6.7 per cent the month before. Euro area numbers are due to be published on Wednesday.

Eurostat said on Monday that crucial eurozone inflation data would include an estimate only for Germany. This came after the bloc’s biggest country delayed the release of its own figures, the agency added.

Christopher Rieger, head of rates and credit research at Commerzbank, said: “This makes the guesswork for tomorrow’s HICP (harmonised index of consumer prices) not easier, where the flash number will have to be estimated without German input.”

“If anything, the missing German numbers could mean downside risk to headline, and upside risk to core inflation in the HICP Eurostat estimates,” he added.

Italy’s 10-year government bond yield fell 5 bps to 4.3 per cent, with the gap between Italian and German 10-year yields tightening to 195 bps. That gap is used as a gauge of the risk premium for the government bonds of southern Europe’s highly indebted countries. REUTERS