European Government Bond Yields Decline as Inflation Eases

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European government bond yields have seen a decrease, accompanied by a decline in the euro, as traders are adjusting their expectations for an imminent interest rate hike by the European Central Bank (ECB). This change in sentiment follows recent data showing a moderation in underlying inflation.

Based on Eurostat’s flash estimate, Eurozone consumer price inflation stood at 5.3% in August, unchanged from the previous month. However, core inflation, which excludes volatile items such as food and energy, dropped from 5.5% in July to 5.3%.

While inflation remains above the ECB’s target of 2%, the more stable core inflation figure, coupled with weaker economic activity surveys in the region, has led the market to lengthen the odds of another interest rate increase at the ECB’s upcoming meeting in two weeks.

Commenting on the situation, Jamie Dutta, a market analyst at Vantage, stated, “Today’s decrease in core eurozone inflation has significantly increased the likelihood of an ECB pause at its September meeting.”

Over the past 13 months, the ECB has steadily raised its deposit rate from -0.5% to 3.75% in an effort to combat inflation, which reached a record high of 10.6% in October of last year due to soaring energy prices.

Dutta added, “Traders had been hesitant to fully price in a final increase of 25 basis points, with the implied probability hovering around 50% in recent weeks. However, following this data release, these bets have decreased to approximately a one in three chance, resulting in new lows for the euro during the day.”

Looking ahead, the European economic research team at Nomura, led by George Buckley, believes that the latest report “provides justification for the ECB to skip a rate hike in September in a hawkish manner. However, we anticipate that by October, the data will indicate a de facto end to the ECB’s hiking cycle, ultimately leaving the deposit rate at a terminal level of 3.75%.”

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European Inflation Data Sparks Debate Among Experts

Despite the latest inflation data, not everyone is convinced that the European Central Bank (ECB) will maintain its current stance. While some believe that inflation is showing signs of stability, others argue that a return to the era of low inflation is unlikely in the near future.

Marc Schartz, a European equities portfolio manager at Janus Henderson, expressed his skepticism, saying: “Today’s European CPI prints show that inflation is proving sticky. While we can expect certain inflationary components to ease by the end of the year, we do not anticipate a significant turnaround.”

In response to this uncertainty, the euro has experienced a slight decline, sliding 0.4% to $1.0876 on Thursday. This decrease in value comes as the 2-year German bond yield, known for its sensitivity to monetary policy, fell by 7.4 basis points to 3.008%.

The stock markets in Europe have also reacted differently to the inflation data. Germany’s DAX 40 experienced a 0.6% increase after failing to participate in a previous rally, while France’s CAC 40 lost 0.2% due to disappointing results from Pernod Ricard, causing its shares to drop by 4%. The UK’s FTSE 100, however, remained relatively stable.

CMC Markets faced its own challenges as its shares fell by nearly 5% and hovered just above four-year lows around 108p. The London-listed spread-betting group was downgraded to underweight by Jefferies, who set a price target of 80p. Jefferies cited CMC’s third profit warning this year as evidence that external factors beyond management control are impacting its performance.

In summary, while the latest inflation data has sparked debate, there is still uncertainty surrounding the future trajectory of inflation in Europe and its implications for various financial markets.

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