Stable Euro Zone Bond Yields Amid Slight U.S. Inflation Rise

Euro zone bond yields remained stable on Wednesday after U.S. consumer prices showed a slight increase in July. This data supports expectations of a quarter-point rate cut from the Federal Reserve in September, while German bond yields stay low as investors anticipate further ECB rate cuts this year.

Euro zone bond yields remained largely unchanged on Wednesday following a modest rise in U.S. consumer prices for July. This data reinforces the likelihood of a quarter-point rate cut from the Federal Reserve in September, although it may not support a more substantial move.

The U.S. Consumer Price Index (CPI) saw a 0.2% uptick last month after a 0.1% decline in June, according to the Labor Department's Bureau of Labor Statistics. Annually, CPI increased by 2.9%, down from 3.0% the prior month.

Michael Brown, senior research strategist at Pepperstone, commented, "It seems rather unlikely that the inflation figures will materially alter the policy outlook, though the data does likely help to provide officials with further confidence in the disinflationary process."

The yield on Germany's 10-year bond was slightly down at 2.179%, demonstrating stability compared to pre-data levels. The benchmark German yield has significantly decreased from a six-month high of 2.707% in May as both Euro zone and U.S. inflation rates have cooled.

Richard Carter, head of fixed interest research at Quilter Cheviot, stated, "Today's U.S. inflation figure clears the runway for the Federal Reserve to initiate a rate cut at its September meeting." However, he warned of potential disparities in the anticipated pace of these rate cuts.

Interest rate futures currently project a 25 basis point cut from the Fed in September, with a 45% chance of a larger 50 bp move. Markets are also predicting over 100 bps of easing by year-end, implying at least a quarter-point cut at all three remaining meetings, with a possibility of a 50 bp cut.

Carter added, "The economic picture is one of a weaker consumer and businesses coming under pressure, but stable enough that rates will not drop quickly."

Meanwhile, a slight upward revision in French inflation to 2.7% for July applied marginal pressure on bond yields in the European morning.

Italy's 10-year yield stood still at 3.57%, with the gap between Italian and German bond yields steady at 138 bps. Germany's two-year bond yield increased by 1.5 bps to 2.354%.

Bounce in bond yields has been observed over the last week and a half due to concerns about a potential slowdown in the U.S. labor market and unwinding of significant equity and currency trades, adding volatility to financial markets. Investors found reassurance in cooler inflation data with bond yields falling and stock prices rising following softer-than-expected U.S. producer price figures on Tuesday.

On Wednesday, traders anticipated around 70 bps of further rate cuts from the ECB this year, following a 25 bp reduction to 3.75% in June, with little change from earlier in the week.

(With inputs from agencies.)