Investors increase ECB cut bets
INVESTORS increased their bets on future European Central Bank (ECB) rate cuts on Friday, sending euro area government bond yields lower as data showed US producer price inflation was weaker than expected in December.
Money markets priced in 155 basis points (bps) of policy rate reductions by yearend from 145 before the US figures and 140 bps late on Thursday.
They also fully priced in a first ECB move in April, while the chances of a rate cut in March rose slightly to around 40%.
ECB Chief Economist Philip Lane said recent figures broadly confirmed current thinking at the central bank, but interest rate cuts are not a near-term topic of debate.
ECB euro-short term rate forwards priced in a 2.36% rate in December 2024, which implies a deposit facility rate at around 2.45% by yearend from the current 4%.
US producer prices unexpectedly fell amid a decline in the cost of goods, while prices for services were unchanged, which bodes well for lower inflation in the months ahead.
Analysts said the central banks’ emphasis on data dependency makes markets more prone to volatility and overshoots more in the dovish direction, but some reckon money markets went too far in their bets on future ECB moves.
Markets passed through strong US consumer prices, released on Thursday when short-dated US Treasury yields briefly moved higher before ending the day down 10 bps. — Reuters
