Euro zone yields nudge higher as inflation hits 4%, investors weigh US midterms

​Benchmark euro zone bond yields ticked higher on Wednesday after data showed inflation in the region rose to a three-year high in October, while investors also weighed the potential impact of the Democrats' midterm sweep. The ‌outcome of the midterms could hold broad implications for market-sensitive areas including the AI data-centre buildout, the US fiscal outlook, defense spending and regulation in areas such as healthcare, banking and cryptocurrencies.

Markets also weighed the potential for legislative gridlock between US President Donald Trump's administration and the newly elected Democratic-controlled Congress. Meanwhile, ‌uncertainty about Washington's next moves in the US-Israeli war on Iran, and what this could mean for energy prices and inflation, persisted. German 10-year ‌government bond yields were last around 1.5 basis points higher at 3.3253%. Ten-year US Treasury yields fell 1.7 bps to 4.9311%.

In the euro zone, data released on Wednesday showed that inflation rose to 4% in October from 3.8% a month earlier, in line with expectations of economists polled by Reuters. A closely watched 'core' figure, which strips out volatile food and ⁠energy prices, ​held steady at 2.5%, also ⁠in line with expectations.

The core reading showed that, so far, the Iran war-driven energy price spike is not having a substantial impact on domestic price pressures, Jack Allen-Reynolds, deputy chief ⁠euro zone economist at Capital Economics, said. "If energy prices remain around their current levels, energy inflation will probably edge down in November. But we suspect that the impact ​of higher energy costs will feed through to food and core inflation more noticeably in the coming months," he said.

Germany's 2-year government ⁠bond yield, which is typically more sensitive to inflation and interest rate expectations, was up 3.3 bps to 3.0506%. Italy's 2-year bond yields rose around 3 bps to 3.53%. The European ⁠Central ​Bank opted to keep rates steady last week, having increased them twice so far this year in an effort to contain inflation.

Another hike could come in December, with a growing list of policymakers backing such a move. Bundesbank President Joachim Nagel said on Tuesday evening that "from today's ⁠perspective, an interest rate hike in December is very likely necessary." "There seems to be little alternative to an interest rate hike unless the inflation ⁠outlook improves significantly," he said.

Money markets were ⁠last pricing in a roughly 72% probability of a December hike, slightly higher than before the inflation data. Traders were last pricing in two more 25-basis-point hikes from the ECB by mid-2027. Allen-Reynolds, however, said that a ‌hike in December ‌could mark the end of the ECB's tightening cycle.