Euro Zone Yields Fall as US Payrolls Seen Easing Rate-Hike Pressure

By Yoruk Bahceli and Dhara Ranasinghe

(Reuters) – Euro zone government bond yields fell on Friday, falling in line with U.S. peers, after a closely watched U.S. employment report showed unemployment rising and job growth slowing in August.

U.S. employers hired more workers than expected in August, but moderate wage growth and a rise in the unemployment rate to 3.7% could ease pressure on the Federal Reserve to deliver a third 75 basis point interest rate hike this month.

“With wage growth coming in lower than expected it (the jobs data) points to a slower pace of rate hikes after September’s expected 75 basis point move,” said ING chief international economist James Knightley.

The jobs data was met with relief in U.S. and euro area bond markets, where yields have shot higher in recent weeks on fears of rising inflation and interest rates.

But in late Friday trade, benchmark 10-year bond yields were down sharply across the region.

Germany’s 10-year bond yield, for instance was 6 basis points (bps) lower at 1.51%, having risen to 1.63% on Thursday, the highest since end-June.

Italian 10-year yields were down 12 bps on the day at 3.83%, having pushed above 4% on Thursday for the first time since June.

The bloc’s bond yields have risen again this week as investors sharply raised their bets on a large 75 bps rate hike from the ECB at its policy meeting next Thursday. That followed hawkish rhetoric from policymakers and another higher-than-expected rise to a new record high in August inflation.

“I think we’re going to be range-bound in outright yields until the ECB meeting,” said Peter McCallum, rates strategist at Mizuho in London.

“In Europe it’s more a story about the market viewing things as more fairly priced given how much has been factored in for the ECB meeting,” he added.

Money markets price in over an 80% chance of a 75 bps hike at the meeting, levels similar to Thursday, according to Refinitiv data, compared to less than 50% last Friday.

The closely-watched spread to German peers was at 233 bps, after rising to 243 bps on Thursday, when it neared levels at which the ECB first promised its new tool, now called the Transmission Protection Instrument, to contain large divergences between member states’ borrowing costs it sees as unwarranted.

BNP Paribas became the latest bank to revise its call for a 75 bps move next week.

A senior economist at German insurer Allianz meanwhile said the ECB would likely have to cut rates early next year in the face of recession.

(Reporting by Yoruk Bahceli and Dhara Ranasinghe ; Editing by Angus MacSwan, Raissa Kasolowsky and Jonathan Oatis)