Wednesday 12 December 2018

Slower Euro area inflation steadies bond markets

After a strong start to the year in which investors speculated the European Central Bank would withdraw stimulus as the region's economy recovered well, the euro has stumbled. (Stock picture)
After a strong start to the year in which investors speculated the European Central Bank would withdraw stimulus as the region's economy recovered well, the euro has stumbled. (Stock picture)

Eurozone bond yields held near recent lows on Wednesday as inflation in the bloc slowed, potentially complicating the European Central Bank's plan to remove monetary stimulus and move towards raising rates.

The euro fell to a six-week low after an upbeat assessment of the US economy by Fed Chairman Jerome Powell boosted the dollar, while slowing eurozone inflation underlined the ECB's caution in removing stimulus in the region.

After a strong start to the year in which investors speculated the European Central Bank would withdraw stimulus as the region's economy recovered well, the euro has stumbled.

A more hawkish signal from the US central bank and investors betting that the dollar had been oversold have hurt the euro in recent weeks.

Annual consumer price inflation dropped as expected to 1.2pc in February, capping a steady fall from 1.5pc in November. The ECB wants to raise inflation to a target of below, but close to, 2pc.

Most eurozone government bond yields edged lower on the day - implying lower borrowing costs.

The yield on Germany's 10-year government bond, the benchmark for the bloc, dropped a touch to 0.674pc, well off the recent multi-year high of 0.81pc. It is set for its first monthly fall since October, down 1.5 basis points.

France's 10-year government bond yield fell one basis point to 0.94pc, well off the 1.05pc level of the start of February.

Ireland's 10-year bond yield was hovering above 1pc.

Bond markets in Europe and the United States had taken a knock on Tuesday after US Federal Reserve Chairman Jerome Powell said data since December pointed to a strengthening economy and his confidence had increased that inflation would rise.

Italy holds a national election this Sunday - the same day that Germany finds out the results of a ballot of Social Democrat party members on a coalition deal with Chancellor Angela Merkel's conservatives.

A month-end tally shows European shares lost 3.8pc in February, their first monthly loss since November.

UK shares fell yesterday, dragged down by miners after weak factory data from China.

In Dublin the Iseq was down slightly at 6703.06 in light, snow-hit, trading.

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