Euro zone yields rise as markets further trim bets on rate cuts

Euro zone sovereign bond yields rose and money markets trimmed bets on future rate cuts on Monday after U.S. data and remarks by Federal Reserve chair Jerome Powell strengthened expectations that central banks will not need to ease policy quickly.

Euro zone sovereign bond yields rose and money markets trimmed bets on future rate cuts on Monday after U.S. data and remarks by Federal Reserve chair Jerome Powell strengthened expectations that central banks will not need to ease policy quickly. Investors sold off sovereign bonds on both sides of the Atlantic on Friday following data showing an unexpected surge in U.S. job growth, prompting a rapid reassessment of how many rate cuts major central banks might deliver in 2024.

Bond prices move inversely with yields. The Federal Reserve can be "prudent" in deciding when to cut its benchmark interest rate, as a strong economy allowed central bankers time to build confidence that inflation will continue falling, Powell said in an interview that aired on Sunday.

Analysts expect the European Central Bank to bide its time to relax monetary policy despite weak economic data. "For now, central banks are in risk-management mode, and they are willing to be patient," said Rohan Khanna, head of euro rate strategy at Barclays.

"While the recent data trajectory could validate the Fed's wait-and-see approach, the same may not be so obvious for the ECB, the growth and inflation projections of which are too high in our view," he said, adding that he left Barclays' portfolio of trades unchanged after Friday's U.S. figures. German exports fell more than expected in December due to weak global demand.

Germany's 10-year bond yield, the benchmark for the euro zone, rose 4.5 basis points (bps) to 2.27%. The lack of orders in manufacturing is increasingly becoming a burden on the German economy, the Ifo Institute said.

However, while the German economy is struggling, the so-called periphery is doing better with the service sector increasing after five straight months of contraction in Italy and growing at the fastest pace in six months in Spain. Meanwhile,

investor morale in the euro zone improved for the fourth consecutive month in February.

The ECB euro-short-term rate (ESTR) forwards last priced in around 125 basis points (bps) of rate cuts by year-end , down from 138 bps immediately before the release of U.S. data on Friday and from around 175 basis points at the end of last year. The ECB ESTR forwards price in a 60% chance of a first 25 bps rate cut by April, down from fully pricing it early last week.

UBS acknowledged the risk of the cutting cycle starting a bit later, in June, but its base case scenario sees a first move in April, followed by 100 bps this year and 100 bps in 2025, which would bring the depo rate -- currently at 4% -- back to the broadly neutral rate of 2% by end-2025. In an interview released on Friday, ECB policymaker Joachim Nagel said it was too early to cut interest rates, after unexpectedly stating that the ECB has tamed the "greedy beast" of inflation, early in the week.

Investors are awaiting the ECB consumer expectations survey due on Tuesday, flagging that a further drop in 3-year consumer inflation expectations from the current level of 2.2% would bring the measure to levels observed before the war in Ukraine. Italy's 10-year government bond yield rose 3 bps to 3.84%.