ECB’s “Hawkish Cut” Lifts Euro, Halts Bond Rally 

ECB Interest Rate

The global bond market’s recent winning streak came to a halt following the European Central Bank’s (ECB) decision to raise its inflation forecasts alongside an anticipated rate cut. Led by ECB President Christine Lagarde, officials signaled a commitment to maintaining restrictive policy rates despite acknowledging improvements in the inflation outlook. This “hawkish ease” stance prompted a rise in bond yields worldwide, with US Treasuries also reacting ahead of the upcoming US payroll data release.

US 10-year yields increased by two basis points to 4.30%, while the S&P 500 experienced fluctuations. European shares remained near record highs, and the euro appreciated by 0.1%. Meanwhile, the yield on 10-year German bonds climbed four basis points to 2.55%.

Although investors anticipate further rate cuts by the ECB, uncertainties surround the timing of such actions. Initial expectations for two additional cuts this year have diminished, with a reduction in September now deemed most probable. Analysts describe the ECB’s decision as a “hawkish cut,” indicating a cautious approach to policy easing.

Traders have intensified rate-cut bets amid softer-than-expected US economic data and the recent easing by the Bank of Canada. However, the reaction to US non-farm payrolls data remains uncertain, with conflicting opinions among investors. Some anticipate a “risk-off” response, others expect a “risk-on” reaction, while a third group foresees negligible or mixed outcomes.

Interestingly, investor attention has shifted towards payroll data over average hourly earnings, indicating a change in market focus. Ahead of the US employment report, Wall Street analyzed various economic indicators, including jobless claims, labor costs, and the trade deficit, which collectively influence market sentiment and future policy decisions.

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