Markets scale back bets on early ECB rate cuts

Euro zone bond yields jumped to one-month highs on Wednesday after strong economic data on both sides of the Atlantic and European Central Bank officials’ remarks pushing back against expectations for a quick monetary easing.

U.S. retail sales increased more than expected in December, keeping the economy on solid ground heading into the new year.

Britain’s annual consumer price inflation (CPI) sped up for the first time in 10 months in December, rising to 4 percent.

Solid economic and inflation figures weaken expectations for quick policy rate cuts.

Germany’s 10-year yield, the benchmark for the euro area, was last up 7.5 basis points (bps) at 2.29 percent, after hitting 2.293 percent, its highest level since Dec 5.

Yields on 2-year notes, most sensitive to expected changes in policy rates, rose by 12 bps in the U.S., and by 16 bps in the UK.

“Expectations for aggressive cuts have to be supported by economic figures, which are consistent with such a backdrop,” said Massimiliano Maxia, fixed income specialist at Allianz Global Investors.

“Today’s U.S. strong data and remarks from ECB officials poured instead cold water on the fire of market forecasts for future rate cuts,” he added.

READ: Cutting interest rates too soon in Europe risks progress against inflation

Dutch central bank chief Klaas Knot said markets were getting ahead of themselves in pricing rapid rate falls, speaking to CNBC at Davos.

ECB President Christine Lagarde told Bloomberg there would likely be majority support among ECB officials for an interest rate cut in the summer, although she stressed they would be data-dependent.

Jussi Hiljanen, head of European rates strategy at lender SEB mentioned UK figures and central bank talk as the main drivers of market moves.

Money markets, which have fully priced a 25 bps rate cut in April since early January, are now discounting an around 75 percent chance of such a move.

They also scaled back their bets on a rate reduction in March, showing a 16-percent chance from around 40 percent a couple of days ago.

Bets on 2024 cuts dropped to 135 bps from around 145 late on Tuesday.

Analysts said that recent comments from ECB officials suggested a first move is likely in June.

READ: ECB must be prepared to discuss rate cuts – Centeno

“By pushing persistently against market expectations for a spring cut, ECB speakers are raising the bar for downside surprises on growth and inflation data over the coming weeks to trigger a deep enough downward revisions in the March staff projections that could trigger a rate cut,” Citi economists said in a research note.

Italy’s 10-year government bonds underperformed their peers, with the 10-year yield hitting 3.938 percent, its highest level since December 13. It was last up 10.5 bps at 3.92 percent.

The gap between Italian and German 10-year yields widened to 163 bps.