German and UK government bonds were on track to close out one of their worst ever months, compounded by eurozone inflation data on Wednesday coming in higher than feared.
The 10-year German Bund yield, seen as a proxy for borrowing costs across the eurozone, has climbed more than 0.7 percentage points in August to trade at 1.54 per cent — reflecting its biggest monthly surge since 1990. The two-year Bund yield, which closely tracks interest rate expectations, has posted its biggest jump in more than four decades — rising 0.04 percentage points on Wednesday to 1.19 per cent.
In the UK, short-dated gilt yields have added more than 1.3 percentage points in August, their steepest ascent since 1994 — jumping 0.13 percentage points on Wednesday to 3.03 per cent. Bond yields rise as their prices fall.
Those debt market moves came as figures on Wednesday showed that eurozone inflation hit a new record of 9.1 per cent in August, higher than July’s figure of 8.9 per cent. The flash estimate of consumer price growth published by Eurostat was higher than economists’ expectations of 9 per cent.
Excluding food and energy costs, core eurozone inflation hit 5.5 per cent, higher than estimates of 5.1 per cent.
Wednesday’s data were widely anticipated by investors searching for clues about how far and fast the European Central Bank will tighten monetary policy to curb price growth, which has been stoked by an escalating energy crisis. The ECB is due to make its next interest rate decision a week on Thursday.
“The further increases in headline and core inflation in August, and likelihood that they will keep rising, will add to the pressure on the ECB to step up the pace of tightening. The balance of probabilities is shifting towards a 75bp hike next week,” wrote Jack Allen-Reynolds, senior European economist at Capital Economics, after the data release.
The ECB raised borrowing costs in July for the first time in more than a decade by an unexpectedly large 0.5 percentage points to zero.
The moves in German and UK bonds this month follow a much stronger July for both markets, reflecting a drastic repricing by investors of the extent to which the ECB and the Bank of England will hoist interest rates to battle inflation.
At a closely watched economic symposium in Jackson Hole, Wyoming, last week, central bankers redoubled their commitment to tackling inflation, even in the face of stuttering economic growth. Hawkish rhetoric at the conference triggered three consecutive days of declines for global equities up to Tuesday’s close.
Several European Central Bank governing committee members have since spoken about the need to continue tightening monetary policy. In a speech in Austria on Tuesday, Bundesbank president Joachim Nagel rejected calls to slow rate rises to protect economic growth.
Some economists have warned that eurozone inflation will move above 10 per cent in the autumn and stay higher for longer owing to surging gas prices. Contracts linked to TTF, Europe’s wholesale gas price, were up 4 per cent on Wednesday at €278 a megawatt hour after reaching a high point of more than €340 a megawatt hour earlier this month.
Russia on Wednesday halted gas flows to Europe via the critical Nord Stream 1 pipeline as Gazprom started three days of planned maintenance on the line.
European equities extended their declines, with the regional Stoxx 600 slipping 0.7 per cent, while London’s FTSE 100 lost 1 per cent.
Wall Street stock futures slipped lower, reversing earlier gains, with contracts tracking the broad S&P 500 falling 0.1 per cent. In Asia, Hong Kong’s Hang Seng closed the session flat and Japan’s Topix fell 0.3 per cent.
The dollar added 0.2 per cent against a basket of six currencies.
Source: Economy - ft.com
