European bonds rally as ECB official signals rate reprieve

BLOOMBERG

A rally in European bonds gained steam on Tuesday after a key European Central Bank (ECB) official raised hopes that the end of the rate-hiking cycle is in view. Yields tumbled across the region, with those on Italian debt sinking 12 basis points after ECB Governing Council member Klaas Knot said monetary tightening beyond next week’s meeting is anything but guaranteed. The yield on 10-year German securities fell as much as 8 basis points to 2.4%, a two-week low.
Equities also staged a recovery from the steepest losses in more than a week, with media and leisure companies pacing a modest gain in the Stoxx Europe 600. Ocado Group Plc shares rose as much as 16% after the UK online grocer’s first-half earnings topped estimates.
A reprieve in inflation is prompting dovish talk among central bankers and speculation they’re ready to back down from the fastest pace of hikes in four decades. ECB Governing Council member Ignazio Visco said inflation may come down more quickly as lower commodity prices start to trickle through the economy.
Meanwhile, US futures steadied ahead of bank earnings. Morgan Stanley and Bank of America Corp may temper early optimism with more downbeat results due before US trading opens, according to Bloomberg Intelligence.
Further afield, China’s stuttering recovery is leading to disquiet as investors consider the knock-on effects from a slowdown in the world’s growth engine. “Investors will be much more interested to understand the outlooks for Q3, as macro continues to deteriorate, mainly in Europe, and China’s expectation of a sudden recovery is faltering,” Luca Fina, head of equity at Generali Insurance Asset Management, wrote in a note to clients.
The dollar remained near its 15-month low on mounting expectations the Federal Reserve is set to wind down its hiking cycle. The euro pared a gain after Knot’s remarks, but remains on track for its longest winning daily streak since October 2004. US headline retail sales data due later is likely to show a 0.5% increase from a month ago, but excluding automobiles and gas, demand has likely weakened, according to a Bloomberg survey.
Treasury Secretary Janet Yellen said the nation is on a “good path” to bringing down inflation without a major weakening in the jobs picture. Bets on longer-term bonds may start to become more popular as the Fed nears the endpoint for the cycle, BMO Capital Markets strategist Ian Lyngen wrote in a note.
The Stoxx Europe 600 rose 0.2% in London. S&P 500 futures were little changed. Nasdaq 100 futures were little changed. Futures on the Dow Jones Industrial Average were little changed. The MSCI Asia Pacific Index fell 0.1%. The MSCI Emerging Markets Index fell 0.5%.
The Bloomberg Dollar Spot Index was little changed. The euro was little changed at $1.1238. The Japanese yen rose 0.3% to 138.31 per dollar. The offshore yuan was little changed at 7.1775 per dollar. The British pound was little changed at $1.3084. Bitcoin rose 0.4% to $30,045.52. Ether rose 0.7% to $1,902.76. The yield on 10-year Treasuries declined five basis points to 3.76%. Germany’s 10-year

yield declined six basis points to 2.42%. Britain’s 10-year yield declined seven basis points to 4.37%. Brent crude rose 0.2% to $78.66 a barrel. Spot gold rose 0.4% to $1,962.15 an ounce.