Europe’s bond recovery drops

Bloomberg

All it took was a strong US jobs report to expose the fragility of last week’s bond rally in Europe.
Within minutes of the print, German bonds had erased almost half of their day-before rally, which had been turbocharged by expectations central banks were nearing an end to their hiking cycles.
Jubilation is giving way to fresh anxiety among bond traders that the world’s largest economy needs a bigger dose of monetary tightening, and the surge in US payrolls served as a reminder that central banks are far from done applying the brakes. Bets on the scope of future hikes in Europe increased slightly after the data, but the risk is the market’s still taking a far-too sanguine view.
Euro-area policy makers have raised interest rates by half a point to 2.5%, the highest since 2008, and signalled another 50 basis-point hike is coming in March.
Though headline inflation slowed more than expected, a separate core metric that strips out energy and food held at an all-time high last month, and it’s still unclear what impact the reopening of China’s economy will have on the pace of price growth in Europe.

“While we may not see many more rate hikes, it doesn’t mean we’re out of the woods yet,” said Azad Zangana, senior European economist and strategist at Schroders plc.
“Investors need to understand that there is two-way risk for the rest of the year.”
But traders shrugged that off, along with ECB President Christine Lagarde’s warnings on underlying inflationary pressures, instead latching onto her verdict that the risks are now “more balanced.”
“Everything is in place for higher rates — you have supported growth, sticky core inflation in Europe, as well as China,” said Ute Rosen, a senior derivatives specialist at Union Investment.