Euro zone bond yields rise after US producer price data

Germany's 10-year bond yield touched a near two-week high on Tuesday after data showed U.S. factory prices rose by more than forecast last month, denting hopes of a summer rate cut from the Federal Reserve.

Germany's 10-year bond yield touched a near two-week high on Tuesday after data showed U.S. factory prices rose by more than forecast last month, denting hopes of a summer rate cut from the Federal Reserve. The U.S. producer price index (PPI) rose 0.5% month-over-month in April, the Bureau of Labor Statistics said. Economists polled by Reuters had expected a 0.3% increase.

The PPI figures "raise the risks that inflation, at least in the U.S., could remain sticky and delay any rate cuts from the Fed," said Jefferies chief economist Europe Mohit Kumar. Germany's 10-year bond yield, the benchmark for the euro area, rose to 2.553%, its highest since May 2. It was last at 2.54%, up 3 basis points (bps). Yields move inversely to prices.

Germany's rate-sensitive two-year yield was up 2 bps at 2.975%. However, reaction was relatively contained ahead of consumer price data on Wednesday which analysts said could provide greater clues on the path of U.S. interest rates.

"We think that most important data this week will be tomorrow's U.S. CPI report," said Camille de Courcel, head of G10 rates strategy for Europe at BNP Paribas. "We think that will be the driver for global rates. And in particular, we think that even an in-line (with expectations) print...would likely see yields go to the downside."

Data on Wednesday is expected to show U.S. consumer price index inflation slowed to 3.4% year-on-year in April, from 3.5% in March. Fed Chair Jerome Powell said on Tuesday that he expects inflation to continue declining in 2024, though his confidence in that has fallen after prices rose more quickly than expected in the first quarter.

The size of the U.S. economy and the importance of the dollar mean global markets - including in euro zone bonds - shift along with expectations of Federal Reserve policy. Jefferies' Kumar said he expects there to be a correlation between euro area and U.S. bonds even as the Fed and ECB diverge on policy.

"ECB will cut in June anyway, irrespective of the Fed, but there is a limit to the extent of divergence between the Fed and the ECB," Kumar said. "In a scenario where we do not get any cuts from the Fed this year, the pace of ECB cuts will slow."

Central bankers in Europe have cautioned that they do not want to stray too far from the Fed's rate path given that it could hurt their currencies. Italy's 10-year yield was 3.5 bps higher at 3.89%, and the gap between Italian and German bond yields widened 1 bp to 134 bps.

Yields have risen this year as U.S. economic data has come in stronger than expected, causing investors to rein in their bets on central bank rate cuts. Survey data released on Tuesday by the German ZEW institute showed business morale in the country hit a two-year high in May, a further sign that the euro zone economy is recovering from a period of stagnation.

"Markets...will continue to focus on the U.S., so whenever new data comes out, it will also have an impact on euro rates," said DZ Bank strategist Sebastian Grupp. "We have recently seen some cooling in the U.S. economy, while the euro zone economy is brightening somewhat, which again argues against a strong decoupling."

The spread between U.S. 10-year Treasury and German bond yields stood at to 192 bps.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)