Germany's Debt Yields and the Eurozone Economic Outlook
Alex
2024-07-26Germany's two-year debt yield hits a new low due to weak economic data, leading to expectations of quicker monetary easing by the European Central Bank. U.S. data reveals faster-than-expected economic growth but lower inflation, influencing a potential September interest rate cut from the Federal Reserve.
Germany's two-year debt yield reached its lowest point since February on Thursday, influenced by weak economic data that led investors to anticipate quicker European Central Bank monetary easing. Although Euro area borrowing costs partially rebounded after U.S. data showed stronger economic growth, lower inflation supported expectations for a Federal Reserve rate cut in September.
'U.S. figures will quiet some voices calling for a cut as early as next week,' said Colin Finlayson, investment manager at Aegon Asset Management. The markets have fully priced in a Fed rate cut for September. U.S. Treasury yields fell on Thursday as a drop in equities drove safe-haven buying of bonds.
Economic data from the euro zone painted a less favorable picture, with the German Ifo Institute reporting a drop in its business climate index to 87.0 in July from 88.6 in June, against an expected 88.9. Additionally, euro zone business activity stagnated as revealed in a recent survey. German short-dated bond yields have decreased while long-dated yields saw a minor fall, making the yield curve its least inverted in six months.
Germany's two-year yield, which is sensitive to policy rate expectations, dropped 3.5 basis points to 2.69%, hitting a low of 2.365% earlier, its lowest level since February. The decline continued over the last three trading sessions due to weak economic data from both sides of the Atlantic. The euro zone benchmark 10-year Bund yield fell by 3 basis points to 2.41%, while the spread between the two rose to -26.5 basis points after a previous low of -23.3 basis points, its least inverted since January.
Money markets have fully priced in 50 basis points of ECB rate cuts with less than a 10% probability of a third easing move by year-end, expecting the easing cycle to conclude around summer 2025 with an ECB deposit rate of approximately 2.5%. The current ECB deposit rate stands at 3.75%.
'Unfortunately for the ECB, the Ifo survey is less clearly deflationary than the PMIs yesterday,' noted Christian Schulz, deputy chief European economist at Citi. 'Hiring intentions fell sharply in the services sector and remained stable in manufacturing, indicating further labor market easing.' However, price expectations marginally rose in downstream services and retail trade industries. Meanwhile, the premium on French bonds climbed to 70 basis points, and further to 71.70 basis points post France's inconclusive election and the far-left's proposal to reverse President Macron's pension reform.
Source：Devdiscourse
