Euro zone preliminary inflation data for March due at 0900
GMT is expected to show core prices, which exclude food and
energy, at a record high of 5.7%, which would keep the heat on
the European Central Bank to keep raising rates.
Two-year German Schatz yields , the most sensitive
to shifts in expectations for interest rates, were up 6 basis
points (bps) at 2.80%. They've risen by 42 bps this week - their
largest weekly increase since early 1990.
The rise has been driven largely by proof that regulators,
central banks and governments on both sides of the Atlantic are
committed to preventing the spread of any problems at smaller
lenders to the wider financial system.
This has boosted equities and delivered a blow to safe-haven
assets like government bonds this week.
However, now the worst of the banking crisis appears to have
been contained for the time being, investors are taking another
look at the inflation outlook and what that might mean for
rates.
"The inflation story is still not very comfortable whether
here in Europe or in the U.S. This morning’s inflation data
reinforces that message," Daiwa Capital senior economist Chris
Scicluna said. "We’re still looking at further tightening from
ECB," he added.
Benchmark German Bund yields were up 2 bps at
2.39%.
Data on Friday showed inflation in France fell to its lowest
in six months, although the drop was slightly less than
forecast, while in the Netherlands, weaker energy prices drove
inflation to its lowest since October 2021.
In Spain, data on Thursday showed inflation fell to its
lowest since August 2021.
Inflation in Germany, harmonised to compare with other
European Union countries, rose by 7.8% in the year in March,
above forecasts for a reading of 7.5%.
In terms of ECB expectations, interest rate derivatives show traders expect rates to peak around 3.65% by November this year. This marks a stark contrast with the start of the month, when money markets showed the expectation was for rates to continue to rise into early next year. The ECB is a long way off hitting its target rate of 2% for consumer inflation, but policymakers will also want to see the cumulative effect of the 350 bps of rate hikes that they've implemented so far, before committing to more big increases. "People will have to see what effect that that tightening has on growth going forward in due course," Daiwa's Scicluna said. Economists at ABN Amro earlier this week increased their forecast for euro zone inflation to reach 4.9% in 2023, up from a previous estimate of 3.5%.
Around the periphery, Italian 10-year yields rose 3 bps to 4.252%, bringing their premium to Bunds to 184 bps. That spread was around 172 bps at the start of the month, highlighting how far German debt yields have dropped relative to others these past few weeks. (Reporting by Amanda Cooper Editing by Mark Potter)
