Surveys indicated the euro zone's economic recovery unexpectedly gathered pace this month. French business activity grew more than forecast in April, while Germany saw a third straight month of expansion. Germany's 10-year yield , the bloc's benchmark, rose 4 basis points (bps) to 2.49% and was on track to end the week around 6 bps higher. It jumped by 25 bps the week before. European yields extended their small gains, along with their U.S. peers, after data showed U.S. business activity accelerated to an 11-month high in April. Volatility has dropped, and bond prices have been range-bound this week as investors turn increasingly cautious about further upward repricing of the policy path after market bets on the ECB's terminal rate reached 3.8%. The November 2023 euro short-term rate (ESTR) was last at 3.75%, implying expectations for the ECB deposit facility rate to peak at 3.85% by year-end. Nonetheless, investors are continuing to keep a close eye on remarks from policy makers in the build up to the ECB's May meeting.
The central bank should maintain a tightening monetary policy that restricts demand, Finnish central bank Governor Olli Rehn said. Meanwhile, Vice President Luis de Guindos said the ECB was unlikely to return to providing guidance on its next policy moves given the uncertainty in the outlook.
Analysts argued economic data would be crucial while markets wait for Federal Reserve and ECB policy meetings in the next couple of weeks. "We expect core inflation to move 20 bps lower in April (5.4%), but signals are still contradictory," said Ruben Segura-Cayuela, Europe economist at BofA. "We needed clear signs of a peak in core inflation as a sufficient condition for the ECB to slow in May," he added. A market gauge of long-term inflation expectations dropped to 2.45% after hitting its highest level since March 7 at around 2.5% on Tuesday. "(Euro area) core inflation is likely to remain at a momentum that will unnerve the ECB," said George Buckley, chief euro-area economist at Nomura. "However, expectations data for February continued to be weak, suggesting there may be weaker second-round effects, posing downside risks to our forecasts," he added, mentioning the European Commission survey quoting service sector three-month price expectations. Italy's 10-year government bond yield rose 5 bps to 4.36, with the spread between Italian and German 10-year yields -- a gauge of investor confidence in the more indebted countries of the euro zone – at 186 bps. Analysts said an S&P rating review, due later on Friday, should be broadly neutral for Italian bonds, as they expected no change. The gap between French and German 10-year bond yields has been relatively stable, despite protests against President Emmanuel Macron's pension reform plan.
It was at 50 bps on Friday after briefly peaking above 60 bps in mid-March. Last weekend, Macron signed a rise in the retirement age into law after three months of protests that brought huge crowds onto the streets and, at times, turned violent. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ESTRfwd ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Stefano Rebaudo; editing by Christina Fincher, Kirsten Donovan and Jonathan Oatis)
