Euro zone bond yields on track for weekly fall after data

It has dropped 7.5 bps during the week and is currently set for its biggest weekly fall since mid-July. "Schnabel's decision to sit on the fence for September feels significant given her last speech in June called for erring on the side of doing too much," Citi analysts said in a note.

Euro area government bond yields were on track for a weekly fall after crucial data from both sides of the Atlantic supported expectations that top central banks could be close to the end of their tightening cycle. Money markets scaled back their bets on a European Central Bank (ECB) September rate hike on Thursday after inflation figures, while investors were assessing a less hawkish stance by ECB policymaker Isabel Schnabel.

U.S. Treasury yields were mixed on Friday after data showed the world's largest economy created more jobs than expected in August but also showed a rise in unemployment. Germany's 10-year government bond yield, the benchmark for the euro area, rose one basis point (bp) to 2.48% after falling 6.5 bps the day before. It has dropped 7.5 bps during the week and is currently set for its biggest weekly fall since mid-July.

"Schnabel's decision to sit on the fence for September feels significant given her last speech in June called for erring on the side of doing too much," Citi analysts said in a note. "The speech argued for a genuine meeting-by-meeting approach amidst the uncertainty," they added.

Money markets are pricing an around 20% chance of a 25 bps ECB hike this month, from 60% right after the release of inflation data from the German state North Rhine-Westphalia on Wednesday. Economists at Nomura said that before the ECB meeting on Sept. 14, the most important data would be the ECB's Consumer Expectations Survey, due next Tuesday, with the central bank focused on long-term expectations.

"The market went for the dovish interpretation, though we think that some of Schnabel's assessments still point to her hawkish nature," said Benjamin Schroeder, senior rates strategist at ING. "She pointed out that under certain circumstances, a hike could also 'insure against the continued elevated risk of inflation remaining above (the ECB's) target for too long'."

ECB's Boris Vujcic, seen as a hawk, underlined that a resilient labour market continued to produce brisk wage growth, while ECB's Francois Villeroy de Galhau said the decision whether to tighten policy further was still open for debate. Euro zone inflation proved unexpectedly stubborn last month, although price pressures for underlying goods eased.

Analysts underlined that the ECB is watching service prices and that this component is a proxy for inflation momentum. The policy-sensitive 2-year German yield was down 3 bps at 2.95%, and it is currently set to end the week down 7.5 bps, in its biggest fall since mid-August.