Benchmark European government bond yields fell alongside the euro as traders reduced bets on an imminent interest rate hike by the bloc’s central bank after data showed easing underlying inflation.
Eurozone consumer price inflation was 5.3% in the year to August, the same as the previous month, according to Eurostat’s flash estimate. However, core inflation, which strips out volatile items such as food and energy, fell from 5.5% in July to 5.3%.
Though still above the European Central Bank’s 2% target, the steadier inflation print, alongside some recent soft surveys of economic activity on the continent, caused the market to lengthen the odds of another interest rate rise by the ECB at its meeting in two weeks time.
“Today’s falling core eurozone inflation print has seen markets move the dial more firmly towards an ECB pause at its September meeting,” said Jamie Dutta, market analyst at Vantage.
The ECB has raised its deposit rate from minus 0.5% to 3.75% over the past 13 months as it strived to suppress inflation that hit a record high of 10.6% last October, amid surging energy prices.
“Traders had been reluctant to fully price in one last increase [of 25 basis points] with the implied probability stuck around 50% over the last few weeks. These bets moved lower to roughly a one in three chance after the data, with the euro making new lows for the day,” he added.
The European economic research team at Nomura, led by George Buckley, said the latest report “justifies the ECB skipping September in a hawkish manner. However, we think that, come October, data will have justified a de facto end to the ECB’s hiking cycle, leaving the depo [deposit] rate at a terminal level of 3.75%.”
However, not everyone was convinced the latest inflation data was sufficiently cool to make the ECB stand pat.
“Today’s European CPI prints show that inflation is proving sticky. While we can expect some inflationary components, like logistics or material costs, to ease into year-end, we also believe that a return to the era of ‘no inflation’ is unlikely any time soon,” said Marc Schartz, European equities portfolio manager at Janus Henderson.
Still, the euro
EURUSD,
slid 0.4% to $1.0876 on Thursday as the 2-year German bond yield
BX:TMBMKDE-02Y,
which is particularly sensitive to monetary policy, fell 7.4 basis points to 3.008%.
Meanwhile, stock markets in Europe were mixed. Germany’s DAX 40
DX:DAX
rose 0.6% after failing to partake in a rally the previous day. The CAC 40
FR:PX1
in France lost 0.2%, weighed down by a 4% drop for Pernod Ricard
RI,
after the drinks group’s results were not well-received. The U.K.’s FTSE 100 was barely changed.
Shares of CMC Markets
CMCX,
fell nearly 5% to hover just above four-year lows around 108p, after the London-listed spread-betting group was downgraded to underweight by Jefferies, with a price target of 80p.
Moving their full-year 2024 earnings forecast to zero, the Jefferies equity analyst team led by Julian Roberts said: The third profit warning this calendar year from CMC is starting to look habitual, and demonstrates to us that factors beyond management control rule the top line.”
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