UK and eurozone government bond prices rose on Wednesday as traders attempted to assess the path of monetary policy ahead of a closely watched European Central Bank meeting.
In the UK, short-dated gilts rallied sharply, with the yield on the two-year bond sliding 0.21 percentage points to 2.96 per cent as its price rose. The 10-year gilt yield fell 0.1 percentage point to just under 3 per cent.
The yield on the two-year German Bund fell 0.08 percentage points to 1.02 per cent. The 10-year Bund yield, seen as a proxy for borrowing costs across the eurozone, fell 0.04 percentage points to 1.57 per cent.
The rally on Wednesday came as newly appointed British prime minister Liz Truss was poised to announce a package this week to alleviate the pressure of soaring energy prices on households and businesses, which some analysts believe could reduce near-term inflationary pressures.
The moves also came ahead of an ECB monetary policy meeting on Thursday. Multiple Wall Street banks have said they anticipate a jumbo 0.75 percentage point increase in borrowing costs, as the region contends with a worsening energy crisis that has stoked rapid price growth. The ECB raised rates in July for the first time in more than a decade by a sharper than anticipated 0.5 percentage points to zero.
But analysts are divided over how far and fast the ECB will move, with some fearing that higher interest rates will hit growth in the region. Matteo Cominetta, a senior economist at the Barings Investment Institute, anticipates a 0.75 percentage point rise on Thursday, followed by smaller rises in October and December.
“I think they’ll not be able to do any more than that because as we move into the [autumn] the evidence of a very deep recession will be clear,” he said.
Stock markets came under pressure on Wednesday after worse than expected Chinese exports data added to concerns over the health of the global economy and intensified questions about how far central banks will jack up borrowing costs.
The regional Stoxx 600 gauge slid 1.1 per cent, while London’s FTSE 100 fell 1 per cent. Hong Kong’s Hang Seng closed 0.8 per cent lower. Stock futures tracking Wall Street’s broad S&P 500 slipped 0.2 per cent lower.
Those declines followed Chinese data earlier in the day that showed exports in the world’s second-biggest economy rose 7.1 per cent last month compared with growth of 18 per cent in July. Economists polled by Reuters had forecast an expansion of 12.8 per cent.
The figures were a “sign that slowing global growth and the normalisation of consumption patterns is weighing on demand for Chinese goods”, wrote Sheana Yue, China economist at Capital Economics.
Hours later, data showed that German industrial output contracted 0.3 per cent on a monthly basis in July, compared with 0.8 per cent growth in the previous month. Economists had anticipated a 0.5 per cent contraction.
Investors have been scrutinising economic releases closely in recent weeks, searching for clues about how aggressively the US Federal Reserve and its peers will tighten the screws on monetary policy to curb inflation.
Markets are now pricing in the possibility of the Fed raising rates by 0.75 percentage points at its late-September meeting, which would mark the third consecutive increase of such magnitude. The Fed’s current target range stands at 2.25 to 2.5 per cent.
Thomas Barkin, president of the Fed’s Richmond branch, told the Financial Times on Wednesday that the US central bank must lift interest rates to a level that restrained economic activity “until such a time as we really are convinced that we put inflation to bed”.
The prospect of further Fed rate rises piled further pressure on the Japanese yen, with the market pricing in a widening chasm between such tightening of policy and the Bank of Japan’s ultra-loose stance. The yen slid as low as ¥144.98 to the greenback, down 1.5 per cent on the day.