German bund yields tumble as weak data set to pressure ECB in new year

European bonds rallied on Friday as weak eurozone purchasing manager data stirred hopes the region’s central bank may be pushed toward interest rate cuts sooner than it wants in 2024.

The 10-year German bund yield
BX:TMBMKDE-10Y
fell 7 basis points to 2.03%, a level not seen since around January, and the yield on the French 10-year bond
BX:TMBMKFR-10Y
was off 10 basis points to 2.55%, a level also not seen since around February.

The euro
EURUSD,
-0.46%
rose 0.3% to $1.0955. The currency has gained 1.7% this week against the dollar, following the Federal Reserve’s surprisingly dovish policy turn and dot plot mapping out three rate cuts this year.

Economic activity in the eurozone contracted in December for the seventh straight month, and by more than expected, data from a purchasing managers’ survey showed Friday, with German and French numbers particularly weak.

The data comes a day after the European Central Bank left interest rates unchanged on Thursday, with President Christine Lagarde saying cuts would not be considered “until data turns conclusive.”

Overall, the purchasing managers index data “will likely give ammunition to those claiming that ECB tightening is choking off the economy, and call for cuts early next year,” wrote HSBC economists Fabio Balboni and Chantana Sam, who note the market is currently pricing three cuts by June.

“But looking beyond the headline, we continue to think that without a meaningful recession, in our view, the urgency by the ECB to cut might not necessarily be there,” they said, referencing comments by Lagarde on Thursday that more information on wages was needed.

“She noted that the first half of next year will be “particularly rich” in terms of data, and that “50% of the employees that we cover in our wage tracker will see their deal renegotiated in H1 2024.” So to us, this still makes it rather unlikely that we will see the first rate cut so early next year, and expect it in June,” they said.

The Stoxx Europe 600 index
XX:SXXP
was only getting a modest lift on Friday, up 0.1% to 477.4, but has gained 1.1% this week and 12% so far in 2023. The index rose 0.8% on Thursday, after two straight losing sessions.

Shares of fashion retailer Hennes & Mauritz
HM.B,
+0.67%
rose 0.7%, following results showing its fiscal fourth-quarter sales that analysts said were more or less in line with expectations.

Some energy names were also gaining with TotalEnergies
TTE,
+1.25%
stock up 1.4%, and among tech names, ASML Holding
ASML,
+2.51%
was up 1.5%.

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