- Wednesday, October 16, 2024
European bonds experienced a rally on Friday following the release of weak eurozone purchasing manager data. This development has sparked hopes that the European Central Bank (ECB) may be forced to implement interest rate cuts earlier than anticipated in 2024.
Notably, the 10-year German bund yield (BX:TMBMKDE-10Y) dropped by 7 basis points to 2.03%, reaching a level not seen since January. Similarly, the yield on the French 10-year bond (BX:TMBMKFR-10Y) decreased by 10 basis points to 2.55%, which is a level not observed since February.
Furthermore, the euro currency (EURUSD) saw an increase of 0.3% against the dollar, reaching $1.0955. Throughout the week, the euro has gained 1.7% versus the dollar due to the Federal Reserve's unexpected switch to a dovish policy approach and the dot plot indicating three rate cuts this year.
Summarizing the economic data, it was revealed that economic activity in the eurozone declined for the seventh consecutive month in December, surpassing initial expectations. The purchasing managers' survey showed notably weak figures for Germany and France.
These developments come after the ECB's decision to maintain interest rates at their current levels on Thursday. President Christine Lagarde stated that cuts would not be considered until there is conclusive data.
Analyzing the overall situation, HSBC economists Fabio Balboni and Chantana Sam anticipate that the purchasing managers index data will provide support for those arguing that ECB tightening measures are adversely impacting the economy. As a result, they anticipate calls for early rate cuts next year. Currently, the market is pricing in three cuts by June.
Overall, with weak economic data and the potential for rate cuts in the near future, European bonds have rallied in response.
Introduction
Despite discussions of a possible recession, the European Central Bank (ECB) may not feel compelled to cut rates in the near future, according to analysts. The ECB President, Christine Lagarde, has pointed out that more information on wages is required before any decisions can be made. Additionally, Lagarde has highlighted that the first half of the upcoming year will see an influx of data, and many employees will have their deals renegotiated. Consequently, this suggests that a rate cut in the early part of next year is unlikely, with analysts predicting it may occur in June instead.
Market Performance
The Stoxx Europe 600 index (XX:SXXP) experienced a modest increase on Friday, rising by 0.1% to reach 477.4 points. Throughout this week, the index has gained 1.1%, contributing to an overall increase of 12% since the beginning of 2023. On Thursday, the index experienced a notable rise of 0.8% following two consecutive sessions of losses.
Fashion Retail and Energy Sectors
Shares of fashion retailer Hennes & Mauritz (HM.B) saw a slight increase of 0.7%, as the company reported fiscal fourth-quarter sales that were on par with analysts' expectations.
In the energy sector, TotalEnergies (TTE) witnessed a gain of 1.4% in its stock value. Among technology companies, ASML Holding (ASML) also experienced positive growth, with its stock rising by 1.5%.
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