Markets price out ECB rate cut this year, German 2-year yield hits three-month high
Markets now see just a 44% chance of a 25 basis point ECB rate cut this year, having seen a 25 bp cut as all but certain last week before the announcement of the EU-U.S. trade deal and the ECB meeting.
At that meeting, the central bank left interest rates unchanged and offered a modestly upbeat assessment of the euro zone economy, though markets largely reacted to a press conference from ECB president Christine Lagarde in which she suggested that the bar for further cuts is high.
Germany's two-year yield rose nearly three basis points on Thursday to as high as 1.965%, its highest since early April.
Rohan Khanna, head of euro rates strategy at Barclays, said that at the press conference Lagarde had sounded dismissive of any factor that could put a dovish spin on the bank's policy path.
Thursday inflation data
from some of the euro zone's biggest economies also gave no reason for further rate cuts, showing price rises at or just above expectations this month, suggesting Friday's bloc-wide data will hold near the ECB's 2% target.
Some policy makers had expressed concern last month that inflation could dip significantly below that target, necessitating further rate cuts, but these fears look less likely to be realised.
Longer dated bond yields dipped slightly, however, causing curves to flatten in market parlance.
Germany's 10-year bond yield, the benchmark for the euro zone, dropped around 1 basis point to 2.70%, reversing a small move the day before.
It is now around 73 bps higher than the two-year yield, making the curve its flattest in a month, albeit after substantial steepening this year.
Longer dated bonds were helped at the margin by a small decline in longer dated Japanese yields after a Bank of Japan policy statement caused market participants to push out expectations for any future interest rate hike.
Still to come is U.S. PCE inflation data, the Federal Reserve's preferred inflation gauge, which is due at 1230 GMT. It is probably more important for markets than European inflation data now that is around target.
The Fed kept rates on hold on Wednesday and said it was still in the early stages of understanding how President Donald Trump's policies, including on trade, will affect inflation, jobs and economic growth.
Other moves were largely in line with the German benchmark. Italy's 10-year yield was down 1 bps at 3.54%, maintaining its gap with Germany at 82.4 bps, holding around its tightest in years.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Khaleej Times
8 hours ago
- Khaleej Times
BOJ gears up to hike rates again but leaves free hand on timing
The Bank of Japan laid the groundwork last week for resuming interest rate hikes by spelling out explicitly for the first time the risks that persistent food price rises fan broad-based inflation. While markets took a dovish reading of BOJ Governor Kazuo Ueda's commentary after Thursday's policy meeting, much of his guidance suggests the bank is inching back towards action after a period of waiting and watching, analysts say. A shift in the board's inflation bias and its less gloomy view on the impact of U.S. tariffs also underscore the BOJ's resolve to pull the trigger once it is convinced the damage from higher levies will be within its expectations. Such hawkish signals in the BOJ's quarterly report, which represents the board's consensus view on the policy outlook, were qualified by Ueda's comments suggesting he was in no rush to raise interest rates. Still, Ueda said Japan was making some progress towards durably hitting the BOJ's 2% inflation target and stressed that its policy rate - at 0.5% - remains very low. "It's not as if we will wait until underlying inflation is firmly at 2%. Our decision is dependent on how likely underlying inflation will reach that level," Ueda told a news conference on Thursday when asked about the next rate-hike timing. All in all, the signals show the BOJ is preparing for another rate hike, while leaving all options open on the exact timing, analysts say. "The outlook report clearly shows the BOJ is starting to lay the groundwork for a rate hike," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities. "The BOJ seems confident about prospects for durably hitting its inflation target," she said. "It may not be in a rush, but signaling that every policy meeting from now will be live." The BOJ holds its next policy meeting in September and another in October, when the board conducts a quarterly review of growth and price forecasts. It holds its final meeting for this year in December. A Reuters poll last month showed a majority of economists expect another rate hike by year-end. Swap rates indicate a 54% chance the BOJ will raise rates to 0.75% in October and a 71% chance in December. Second round effects When the BOJ compiled its previous outlook report on May 1, Ueda signalled a pause in its rate-hike cycle as President Donald Trump's April announcement of sweeping "reciprocal" tariffs jolted markets and stoked fears of global recession. Thursday's report showed signs the BOJ has ended that pause, as markets restored some calm and Japan's trade agreement with the U.S. in July reduced some uncertainty. For one, the BOJ removed the word "extremely" in describing uncertainty over U.S. trade policy. While Ueda stressed the need to await more data on the impact from U.S. tariffs, he said the risk of the economy "falling off the cliff" has diminished. The board also revised up its inflation forecast and said risks to the price outlook were balanced - a more neutral stance from that of May 1 describing risks as skewed to the downside. Furthermore, the BOJ report for the first time included a detailed assessment of how rising food costs - once seen as transitory - may lead to broad-based price rises. "It is possible that price rises will persist for longer than expected" as companies are passing on not just raw material but labour and distribution costs, the report said. A steady rise in the price of items like food, which consumers buy frequently, may induce "second-round effects" on underlying inflation, the BOJ said in the strongest warning to date on mounting price pressure. To be sure, food prices are among several factors the BOJ looks at in judging whether underlying inflation - or price rises driven by domestic demand - will durably hit its 2% target and justify raising rates. Other measures show underlying inflation remains short of 2%, Ueda said, brushing aside the view the BOJ may be behind the curve in addressing the risk of too-high inflation. But he said the BOJ must keep an eye out on how food prices and headline consumer inflation, which has remained above its target for well over three years, could affect inflation expectations. In exiting a decade-long stimulus last year and raising rates to 0.5% in January, the BOJ pointed to growing signs companies were shedding their long-held aversion to price hikes. Such change in corporate behaviour may be accelerating. A total of 1,010 food and beverage items saw prices rise in August with more than 3,000 items likely to see higher prices in October, think tank Teikoku Databank said on Thursday. "Food inflation will undoubtedly persist, which is probably why the BOJ highlighted the risk so clearly in the report," said veteran BOJ watcher Mari Iwashita. "Once there's more clarity that wage hikes will continue, the BOJ might go ahead and raise rates."
Al Etihad
2 days ago
- Al Etihad
German consumer group sues budget airlines over hand luggage fees
2 Aug 2025 11:09 BERLIN (dpa)A German consumer group has launched legal action against several budget airlines over what it describes as unlawful charges for hand luggage."Ryanair, EasyJet and others lure customers with low fares that don't include standard hand luggage. That's deceptive and violates existing law," Ramona Pop, chairwoman of the vzbv consumer umbrella body, told the Neue Osnabrücker Zeitung newspaper in remarks published on said airlines are obliged to carry reasonable hand luggage at no additional cost, but in many cases, only a small personal item is included in the base fare, with larger bags requiring a paid upgrade.'The size limits used by many carriers contradict EU law,' she a first step, vzbv issued formal warnings to several carriers. Pop said lawsuits have now been filed against Ryanair, EasyJet, WizzAir, and Vueling Airlines.'In our view, they are charging inadmissible fees and thus misleading consumers about flight prices,' Pop called on the European Union to set clear rules and standards for free hand luggage. The vzbv's legal action is part of a broader Europe-wide campaign, she to the consumer group, its legal argument draws on a 2014 ruling by the European Court of Justice. The ruling determined that hand luggage is a fundamental part of air travel, not an optional extra provided by the airline. Consumer advocates argue that airlines should not be allowed to charge extra for it, provided the bag meets reasonable size and weight limits and complies with safety regulations.
Zawya
2 days ago
- Zawya
Global shares in red after US jobs data, Trump's tariff salvo
Global shares remained in the red on Friday after weaker than expected U.S. jobs data prompted markets to add to rate cut bets from the Federal Reserve, following earlier losses sparked by U.S. President Donald Trump's latest tariffs salvo. Nasdaq futures and S&P 500 futures were down about 1% after the data, broadly in line with where they were before the release. The pan-European STOXX 600 fell 1.4%, taking its weekly fall to about 2% and putting it on track for its biggest weekly drop since Trump announced his first major wave of tariffs on April 2. The U.S. economy added 73,000 nonfarm payrolls last month, below expectations for 110,000 in a Reuters survey of economists. The unemployment rate ticked up to 4.2%. "There's no way to pretty-up this report," said Brian Jacobsen, chief economist at Annex Wealth Management. "Last year the Fed messed up by not cutting in July so they did a catch-up cut at their next meeting. They'll likely have to do the same thing this year." Money market traders added to bets for a rate cut from the Fed at its September meeting. Markets imply around a 90% chance of a rate cut next month, compared with about 45% before the jobs data, according to LSEG data. The softer labour market figures arrived a day after Trump signed an executive order imposing tariffs ranging from 10% to 41% on U.S. imports from several major trading partners. Rates were set at 25% for India's U.S.-bound exports, 20% for Taiwan's, 19% for Thailand's and 15% for South Korea's. He also increased duties on Canadian goods to 35% from 25% for all products not covered by the U.S.-Mexico-Canada trade agreement, but gave Mexico a 90-day reprieve from higher tariffs to negotiate a broader trade deal. "The August 1 announcement on reciprocal tariffs is somewhat worse than expected," said Wei Yao, research head and chief economist in Asia at Société Générale. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.5%, bringing the total loss this week to roughly 2.7%. Japan's Nikkei closed 0.7% lower, Chinese blue chips ended 0.5% down and Hong Kong's Hang Seng index lost more than 1%. The U.S. dollar had earlier found support from fading prospects of imminent U.S. rate cuts, but reversed course after the data. The dollar index, which measures the currency against six others, was last down 1% on the day. The yen had weakened past 150 per dollar for the first time since April but strengthened to 148.71 per dollar after the data. The Bank of Japan held interest rates steady on Thursday and revised up its near-term inflation expectations, but Governor Kazuo Ueda sounded a little dovish in the press conference. Two-year Treasury yields, which are sensitive to changes in interest rate expectations, dropped 17.5 basis points to 3.7761%. Benchmark 10-year yields slipped 9 basis points to 4.273%. In commodity markets, oil prices continued to fall after a 1% plunge on Thursday. Brent dipped 0.3% to $71.55 per barrel, while U.S. crude fell 0.1% to $69.22 per barrel. Spot gold rose 1.3% to $3,332 an ounce.
