Eurozone Inflation Fails to Thwart ECB Rate Cut Expectations

German Bund yields rose slightly as U.S. and euro zone inflation data did not shift expectations for the European Central Bank's (ECB) rate-cutting plans. Despite a higher-than-expected euro zone inflation print of 2.6%, markets still anticipate significant ECB rate cuts this year, with pivotal meetings ahead.

German Bund yields were slightly higher on Friday after inflation data from the U.S. and from the euro zone failed to shift market bets on the European Central Bank’s rate-cutting plans.

Yields had hit a fresh six-month high earlier in the session after euro area figures showed that inflation rose in May. The closely watched U.S. personal consumption expenditures (

PCE ) index -- the Federal Reserve's favourite inflation gauge -- rose in line with expectations.

The higher-than-expected euro zone inflation print

of 2.6% is highly unlikely to disrupt the market's expectation of an ECB rate cut next week. Markets are currently pricing around 57 bps of rate ECB rate cuts in 2024, and are indicating a 25 basis points reduction in June, and one more by year end.

In recent weeks, however, they have been gradually paring back expectations of a third cut this year. The German 10-year bond yield, the benchmark for the euro zone bloc, was last one basis point (bp) higher at 2.66%, after earlier hitting 2.707%, its highest since mid-November.

Germany's two-year yield, which is more sensitive to ECB rate expectations, was 1.5 bps higher at 3.09%, after reaching an over six-month high at 3.125%. The increase in the euro zone inflation was expected and the data is "neither good nor bad," ECB governing council member

Fabio Panetta said on Friday."

The data will nonetheless shape the narrative at the ECB's meeting on June 6. Recent communication from rate setters indicate a rate cut is all but certain, but they have given few indications for their plans after that. Italy's 10-year yield was higher by 0.5 bps​ at 3.96%, and the gap between Italian and German bunds widened slightly to 129 bps.