end euro zone yields surge as upbeat data dents jumbo ECB-cut bets

German 2-year yield hits three week high

Italy 10-year yields hits eight week high

Euro zone economy grows by 0.4% in Q3, twice as fast as expected

ECB does not need to stimulate economy – ECB’s Schnabel

Traders trim bets on large ECB cut

By Samuel Indyk and Medha Singh

LONDON, – Shorter-dated euro zone bond yields jumped on Wednesday after a batch of better-than-expected data, including a rise in German inflation, dented expectations that a large rate cut was needed in December to support the regional economy.

The euro zone economy grew faster than expected last quarter, but threats such as oversized tariffs from a potential Donald Trump presidency kept the outlook weak.

Among core regions, Germany’s gross domestic product unexpectedly increased in the third quarter, skirting a recession, and inflation rose more than expected in October, interrupting the downward trend in Europe’s troubled largest economy.

Preliminary data showed French economic growth beat estimates in the third quarter due to the impact of the Paris Olympic Games, while Spanish 12-month EU-harmonised inflation was in-line with a Reuters poll.

“Today’s data – higher inflation together with good news on euro zone Q3 GDP – further support our call that the European Central Bank will stick to a 25 bp rate cut at its next policy meeting,” said Salomon Fiedler, economist at Berenberg.

Indeed, money markets were quick to trim bets on easing from the ECB at December’s policy meeting.

While markets are fully pricing a quarter-point cut, the chance of an outsized 50 basis point move dropped to around 24%, from around 45% before the data was released.

Germany’s two-year yield, which is sensitive to changes in interest rate expectations, jumped to a three-week high of 2.282%. It was last up 10 basis points at 2.271%.

European Central Bank board member Isabel Schnabel on Wednesday acknowledged the string of stronger economic reports and pushed back against calls for ultra-easy monetary policy that had emerged earlier this month.

Germany’s 10-year yield, the benchmark for the euro zone, was up 4 bps at 2.377% after hitting a three-month high.

Wednesday’s centrepiece was the first budget from Britain’s new finance minister, Rachel Reeves, in which she unveiled the biggest tax increases in three decades and paved the way for higher UK borrowing for long-term investment.

The budget proposal showed the government was on course to borrow almost 142 billion pounds more over the next five years compared with previous estimates.

British gilt yields rose across the curve, with the 10-year gilt yield rising 4 bps to 4.36%, reversing an earlier fall.

The gap between British and German 10-year yields rose to 201 bps, its widest since August 2023.

“Because the fiscal numbers are so expansionary, the outlook for monetary policy is now less dovish and that’s causing the market to reverse,” said Laurence Mutkin, head of EMEA rates strategy at BMO.

Two-year UK gilt yields rose 6 bps to 4.32% as investors priced in slower rate cuts from the Bank of England.

Elsewhere, Italy’s 10-year yield hit an eight-week high of 3.639% and was last up 7 bps at 3.633%. The Italian treasury sold the maximum planned amount of 9 billion euros at auction on Wednesday.

The spread between Italian and German 10-year yields widened by 3 bps to 125 bps, a function of shifting ECB expectations, said Sophia Oertmann, senior rates analyst at DZ Bank.

This article was generated from an automated news agency feed without modifications to text.