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Double digit inflation in UK is cooling European markets

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Euro-zone government bond yields rose yesterday as double-digit UK inflation data returned investor focus to a possible further tightening of monetary policy in the euro-zone.

Germany’s two-year government bond yields, which are sensitive to rate hike expectations, rose 12 basis points (bps) to 0.7 percentage point, the highest since July 21. The 10-year yield rose 10 basis points to 1.09 percentage points, its highest level since July 22

“Yields have risen in recent days on a combination of fears of higher inflation and portfolio repositioning following a bond rally that began in mid-June,” said Annalisa Piazza, research analyst at MFS Investment Management.

“Gund yield levels are close to their fair values ​​- but we still see some risk of them overshooting, with inflation data remaining the main driver,” she added.

British consumer prices rose 10.1 percent in July, the highest since February 1982.

Matthew Ryan, head of market strategy at fintech firm Ebury, stressed that in the UK “core inflation was also much higher than expected (6.2%), providing further worrying confirmation that price increases are not being driven solely by energy growth”.

Central banks are concerned about second-round effects if rising wage growth and long-term expectations push inflation higher on a sustained basis.

The 10-year Italian government bond yield rose 12.5 basis points to 3.27 percent, hitting a nearly three-week high.

The spread between Italian and German 10-year yields widened to 220 basis points, a weekly high, after bottoming at around 200 basis points earlier this week.

In July, the Italian government led by Mario Draghi collapsed and the spread widened to around 260 basis points.

It then intensified as fears eased that the country might distance itself from the European Union if the conservative coalition wins September 25 elections and after the ECB supported peripheral government bonds in July.

US stocks pared losses significantly in afternoon trade on Wednesday, after minutes of the Federal Reserve’s July meeting showed officials said the pace of future rate hikes would depend on incoming data.

Minutes also showed that participants at the meeting said it could take longer than expected for inflation to unwind.

The Fed has raised its federal funds rate benchmark by 225 points this year and the central bank is widely expected to hike rates by either 50 or 75 basis points next month.

“They stayed hawkish, but they also opened the door to maybe a half a percentage point hike in September versus 75,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

“I think the market liked what they wanted said,” he said. “The market has collected fr at the lower end of today’s trading range,” he said.

https://www.independent.ie/business/uks-double-digit-inflation-chills-the-european-markets-41919326.html Double digit inflation in UK is cooling European markets

Fry Electronics Team

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