Euro zone yields edge up after ECB remarks, investors on hold before data
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By Stefano Rebaudo and Sruthi Shankar
Aug 26 (Reuters) - Euro area government bond yields edged up on Monday after European Central Bank officials sounded cautious on future monetary easing, with investors on hold ahead of key economic data later this week.
The bloc's borrowing costs slipped on Friday after Federal Reserve Chair Jerome Powell said the U.S. central bank would support a strong labour market, strengthening expectations for a super-sized 50 basis points (bps) rate cut next month.
Investors are awaiting euro zone inflation figures on Friday after the release of data from Italy and France. Germany and Spain will publish their data on Thursday.
German business morale fell to 86.6 in August, with analysts polled by Reuters expecting 86.0.
Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, rose 0.5 basis points to 2.23%, after dropping 2 bps on Friday.
Traders have been fully pricing 25 bps from the Fed in September for weeks and increased bets on 50 bps to 39% from 24% after Powell remarks. FEDWATCH
Analysts said the scope for a major repricing in bond yields is limited before the August employment report, due on September 6, as Powell's speech at Jackson Hole shifted the focus from upside inflation risks to downside labour market risks.
"Employment reports will be of particular importance in shaping the policy trajectory," said David Doyle, head of economics at Macquarie, which forecasts successive cuts of 25 bps in September, November, and December meetings.
ECB CAUTION
Meanwhile, ECB chief economist Philip Lane struck a more cautious note than the Fed, saying the central bank is making "good progress" in cutting inflation back to its 2% target but could still need a restrictive monetary policy.
Analysts also flagged that governing council member Robert Holzmann, seen as a hawk, warned that the ECB might not lower rates next month.
Market participants label as hawks central bank officials who advocate a tight monetary policy to control inflation, while doves focus more on economic growth and the labour market.
Markets have barely moved bets on ECB rate cuts since Friday, pricing between 65 and 70 bps in 2024. EURESTECBM3X4=ICAP
Traders are also keeping an eye on a fresh spike in tensions in the Middle East after Iran-backed Hezbollah launched hundreds of rockets and drones at Israel in one of the biggest clashes in more than ten months of border warfare.
A report from Citi underscored that if the Middle East conflict were to broaden and impair global oil supply, it would act as a negative supply shock for the global economy, lowering growth, boosting inflation, and creating new headaches for central banks.
However, other issues concerning investors include tensions between the U.S. and China, shifts in global supply chains, and the rising prominence of populist voices.
Italy's 10-year yield IT10YT=RR, the benchmark for the euro area periphery, was up 1.5 bps at 3.58%, and the gap between Italian and German bunds DE10IT10=RR stood at 134 bps.
ESTRDecfwds https://tmsnrt.rs/3X3NwKa
Reporting by Stefano Rebaudo and Sruthi Shankar; Editing by Gareth Jones
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