Europe's dominant service sector roared ahead, although manufacturing activity declined. A figure above 50 is believed to indicate expansion, and the services sector gauge came in at 53, handily beating expectations. Core inflation, the main driver of possible further monetary tightening, “is largely linked to the services sector and a strong labour market, which could amplify wage growth risks,” said Andrzej Szczepaniak, European economist at Nomura. September 2023 ECB short-term euro rate (ESTR) forward rose to 3.67%, implying expectations for a depo rate of around 3.77%. "We haven't seen as weak a winter as we had thought," said Sphia Salim, European rates strategist at Bank of America. "Energy prices are falling so consumers' purchasing power is improving." "For the bond market, if you mix the stronger-than-expected data with growing supply pressures and central banks that are at the very least less dovish than we thought… I think there is a risk of more of a sell-off."
Germany's 10-year yield , the benchmark for the single currency bloc, was up 8 bps to 2.538% on Tuesday, just a few bps off its highest level since August 2011 of 2.569%. The yield hit a six-week high of 2.565% on Friday after European Central Bank (ECB) officials made it clear they want to keep hiking rates.
Yields received a further boost from survey data from Germany's ZEW institute, which showed the country's investors are increasingly upbeat about global financial markets. "Taken together (with the PMI), these numbers are now suggesting that the worst is over for the euro zone economy," said Claus Vistesen, chief euro zone economist at consultancy Pantheon Macroeconomics. Italy's 10-year yield was up 13 bps at 4.47%, after hitting a fresh six-week high of 4.486%. "I think a soft landing (for the economy) is probably the most likely but the thing that nags at me is that monetary policy acts with a lag," said Chris Iggo, chief investment officer for core investments at AXA Investment Managers, before the PMI release. "We've seen quite a lot of tightening coming through globally." The ECB has rapidly raised interest rates to 2.5% from -0.5% in July 2022.
Goldman Sachs economists on Monday said they now expect three more rate hikes this year, up from two previously. The bank now foresees a 50 bp hike in March, followed by 25 in May and another 25 in June, taking rates to 3.5%. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Global business activity Euro PMIs Short euro yields ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Harry Robertson and Stefano Rebaudo, Editing by Louise Heavens, Bernadette Baum and Sharon Singleton)
