Investors sold euro zone government bonds on Friday as reports on private-sector activity in the EU provided further signals of economic growth, strengthening the case for a withdrawal of monetary stimulus.
Despite uncertainty over a delayed US healthcare vote that may have implications for the “Trumpflation” trade, euro zone government bond yields rose one to four basis points on Friday.
The rise came as a survey showed businesses across the euro zone ramping up activity at the fastest pace for almost six years in March, to meet burgeoning demand.
French and German business activity also expanded more than expected in March. Any reading above 50 on the PMI index suggests expansion, and the French number was 57.6, the German 57.0 and the euro zone equivalent 56.7.
"It will be a confirmation of the economic strength in the euro zone, and that means there's more of a case for the ECB to tighten [monetary policy]," said DZ Bank strategist Christian Lenk.
‘On all cylinders’
However, while an analyst with Davy said the figures indicate that the euro zone economy is “starting to fire on all cylinders”, he was sceptical of the ECB raising interest rates.
“It’s not just an export-led story as it was in previous years,” he said. “We’re also seeing a contribution from domestic demand. The labour market is recovering quite well, with unemployment in the euro zone down to 9.5 per cent.
“We’ve had a succession of good news stories, particularly from Germany, in the last few months. There have been calls from certain sectors that the euro zone stance is too loose in terms of quantitative easing and rates, but, really, the prospects of a rate hike are very slim in the near term.”
Euro zone inflation surged to a four-year high in February, zooming past the European Central Bank’s target and putting pressure on rate setters to open talks about when and how the bank’s stimulus measures will be scaled back. This has seen bond yields rise inexorably since, with the yield on Germany’s 10-year bonds, the benchmark for the region, rising 19 basis points in March so far. It was up 1.5 basis points on Friday to 0.44 per cent.
Other high-rated bond yields were up one to two basis points, while lower-rated south European countries saw government bond yields rise three to four bonus points. The likes of Italy, Spain and Portugal generally move most on expectations of tightening as they are seen as the biggest beneficiaries of the ECB’s bond-buying scheme.
‘Trumpflation’ doubts
The rise in yields came even though doubt has grown about US president Donald Trump’s ability to deliver fiscal stimulus measures that were promised during his election campaign last year.
The success of a key healthcare bill later on Friday will be a signal of whether Mr Trump can get growth- and inflation-boosting measures passed into law in the world’s richest country.
Global bond yields and stock markets have risen sharply since December on expectations of “Trumpflation”, but US stocks suffered their biggest daily fall since June earlier this week.
“I am hesitant to read too much into the bond moves while this healthcare reform measure is hanging over the market,” said Lenk.
