In a second day in Congress on Wednesday, Federal Reserve Chair Jerome Powell reaffirmed his message for potentially faster interest rate rises, but emphasised nothing had yet been decided ahead of the March 21-22 meeting, and economic data would be a major factor.
Upcoming labour market figures on Friday and consumer prices data next week will be pivotal in deciding whether rate hikes need to shift back to a higher gear, after the Fed delivered a 25 basis point hike in February.
"After two days of Powell being in Congress, a 50 bp rate hike here later this month is clearly in play," said Piet Haines Christiansen, fixed-income strategist at Danske Bank. Markets are fully pricing in a 25 basis point hike, with around a 70% probability of a larger 50 basis point rate rise, according to data from Refinitiv. European Central Bank (ECB) rate expectations also continue to rise, and the November 2023 ECB euro short-term rate forward is now at 4.058%, implying expectations for a depo rate at around 4.158% by year-end. Markets expect the ECB to raise rates by 50 basis points this month, with around a 90% chance of another half-point rise at the meeting after that, Refinitiv data showed. "If the Fed does go with 50 basis points in March, there will be some upward impact on ECB rate hike pricing, because it's not fully priced in yet," said Lyn Graham-Taylor, senior rates strategist at Rabobank. Germany's 10-year yield , the benchmark for the euro area, was last up 3 basis points (bps) to 2.678%, just below 2.77%, its highest level since 2011, reached earlier this month. The country's two-year yield , more sensitive to changes in interest rate expectations, was up as much as 5 bps to 3.385%, its highest since the global financial crisis in 2008. It was last at 3.35%.
The German yield curve deepened its inversion, with the gap between 2- and 10-year yields dropping to as little as -72 basis points, its lowest since 1992. On Thursday, French ECB policymaker Francois Villeroy de Galhau said inflation across the euro zone was still too high and remained the top priority for monetary policy. A day before, Italian rate-setter Ignazio Visco, often seen as a policy dove, criticised some fellow policymakers for comments on the future path for interest rates.
"There's obviously a bit of division opening up on the governing council, but given the data that's been coming in, a peak in rates around 4% makes a lot of sense," said Rabobank's Graham-Taylor.
Italy's 10-year yield rose 7 bps to 4.493%, pushing the closely watched spread between German and Italian 10-year yields marginally wider to 179 bps. (Reporting by Samuel Indyk; Editing by Sharon Singleton)
