By Stefano Rebaudo
Feb 24 (Reuters) - Euro zone government bond yields
edged down after German economic data on Friday, but were still
within striking distance of their highest levels in more than a
decade as markets priced in a depo rate peaking at around 3.75%.
The German economy shrank by 0.4% in the fourth quarter of
2022 compared with the previous three months, while preliminary
data had pointed to a 0.2% contraction.
Investors are waiting for the U.S. personal consumption
expenditures (PCE) price index for January -- due at 1330 GMT --
one of the key inflation measures tracked by the Federal Reserve
for monetary policy.
Germany's 10-year government bond yield fell 3
basis points to 2.44% after hitting on Wednesday its highest
level since August 2011 at 2.57%.
Germany's 2-year bond yield , the most sensitive
to changes in policy rate expectations, fell 1 bps to 2.89%. It
hit its highest level since October 2008 at 2.2971 on Wednesday.
Markets recently reshaped the curve of the European Central
Bank euro short-term rate (ESTR) after robust economic data and
hawkish comments from ECB officials.
The February flash PMI rose at an unexpectedly strong pace,
driven primarily by a pickup in services activity, showing a
bright scenario combining further declines in natural gas prices
and strong activity data out of China.
Core inflation increased to 5.3% in January, reflecting
strong non-energy goods price gains. Sequential price pressures
remain significantly above the ECB's target while wage growth is
strengthening.
Last week even ECB doves Philip Lane and Fabio Panetta did
not push back firmly against a higher terminal rate, pointing to
a broad agreement that significantly more restrictive policy is
needed to return inflation to target.
According to ECB short-term euro rate (ESTR) forwards, the
ESTR will peak in November at 3.65%, implying expectations for a
depo rate of around 3.75%. The ECB may still need to raise interest rates significantly
beyond March if underlying price growth, remains too high,
Bundesbank President Joachim Nagel said on Friday.
Markets are also bracing for another data-heavy week, with a
flash estimate for the consumer price index in the spotlight.
"A sticky core (inflation) rate means no relief for central
bankers, and thus also little reason for markets to budge from
their pricing of 125bp of further rates increases from the ECB,"
ING strategists, led by Padraig Garvey, said in a note.
Italy's 10-year government bond yield fell 4.5
bps to 4.32%, with the spread between Italian and German 10-year
yields at 187 bps.
(Reporting by Stefano Rebaudo, editing by Sharon Singleton)
