Government bonds rallied on Tuesday as eurozone inflation data strengthened the case for quicker rate cuts by the European Central Bank. At the same time, the U.S. dollar gained ground after Federal Reserve Chair Jerome Powell’s remarks tempered expectations of a big rate cut in the United States.
Eurozone inflation, which dropped to 1.8% in September—below the ECB’s target of 2%—was supportive of the bond market, helping Germany’s 10-year bond yield decline by more than 8 basis points to its lowest level since January. U.S. 10-year Treasuries fell 6 basis points to 3.74%. Michael Brown, senior strategist at Pepperstone, said the market continues to price in the chance of a rate cut at the next Oct. 17 ECB meeting.
In contrast, the dollar was up 0.3% against a basket of currencies as traders started to price in a 25 bp cut rather than a larger 50 bp reduction in November. European stocks gained modestly, up 0.4% for the STOXX 600 index, while U.S. stock futures were mixed.
This inflation report follows comments from European Central Bank President Christine Lagarde, who had exuded confidence that inflation would align with the bank’s target. However, a week of weaker business activity data in the eurozone stoked concerns about growth.
Commodity-wise, oil prices fell even against the backdrop of increasing tensions in the Middle East after Israel’s incursion into Lebanon. Brent crude futures fell 0.7% to $71.23 a barrel as prices adjusted to the realities of higher supply and weakening global demand.
In Japan, the Nikkei was up almost 2% from a big loss the day before; the yen steadied against the dollar. The price of spot gold rose 0.6% and was trading at around $2,650 per ounce, not far from the recent record.
