Euro zone bond yields drop before US CPI hurdle

"We have never been a believer in the divergent story," RBC's Schaffrik said. "I cannot see an environment where we have a full cutting cycle and disinflationary trends in Europe and the opposing view in the U.S. The economies are just too intertwined." The spread between U.S. 10-year Treasuries and German Bunds was last at 193 bps, having widened to around 220 basis points in the middle of April. Meanwhile, data on Wednesday showed that the euro zone economy grew 0.3% in the first quarter, suggesting a slow recovery is underway after six straight quarters of stagnant or negative growth.

Germany's 10-year bond yield fell below the key 2.5% level on Wednesday before U.S. consumer prices data that could help determine whether the Federal Reserve will lower borrowing costs this year and by how much. Germany's 10-year yield, the benchmark for the euro zone bloc, was last down 5 basis points at 2.49%.

"I haven't seen anything specific this morning that led to the move we're now seeing," said Peter Schaffrik, global macro strategist at RBC Capital Markets. "The key event is the U.S. CPI figures later on and Europe has probably followed a little from where the U.S. was leading."

The benchmark U.S. 10-year yield fell to a one-month low of 4.418% on Wednesday, a day after the release of higher-than-forecast producer price inflation data. The figures provided a short-lived lift to global bond yields which quickly retraced as markets digested the details from the report.

"Yesterday's PPI data didn't really move the needle much with a notable beat balanced by some notable down revisions and some of the details being neutral for core PCE," Jim Reid, head of global fundamental credit strategy at Deutsche Bank said in a note, referring to the Federal Reserve's targeted measure of inflation. "So the focus will now shift to April's CPI after 3 upside surprises in a row for core CPI."

Economists polled by Reuters expect core CPI to rise by 0.3% in the month, down from 0.4% in March, for an annual gain of 3.6%, down from 3.8%. A higher-than-forecast reading could again see markets further trim their expectations for easing this year and push back when they expect the Fed to begin cutting interest rates.

Money market traders were now only pricing around 40 basis points of rate cuts from the Fed this year, down from around 160 basis points at the start of the year, as economic growth remained robust and the disinflation process slowed. For the European Central Bank, traders are pricing around 70 basis points of rate cuts this year, or just under three quarter-point moves.

And while the ECB is expected to move earlier than the Fed in 2024, analysts think the likelihood of prolonged easier ECB policy while the Fed keeps rates higher for longer remains slim. "We have never been a believer in the divergent story," RBC's Schaffrik said.

"I cannot see an environment where we have a full cutting cycle and disinflationary trends in Europe and the opposing view in the U.S. The economies are just too intertwined." The spread between U.S. 10-year Treasuries and German Bunds was last at 193 bps, having widened to around 220 basis points in the middle of April.

Meanwhile, data on Wednesday showed that the euro zone economy grew 0.3% in the first quarter, suggesting a slow recovery is underway after six straight quarters of stagnant or negative growth. Italy's 10-year yield was lower by 7 bps at 3.81%, and the gap between Italian and German bunds widened to 132 bps.

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