Euro zone yields higher as US jobs growth accelerates
(Updates at 1612 GMT to close)
By Stefano Rebaudo and Samuel Indyk
Dec 8 (Reuters) - Euro area government bond yields rose on Friday after data showed the U.S. economy added more jobs than expected last month, putting a dampener on expectations for rate cuts from the Federal Reserve early next year.
The U.S. Labor Department said non-farm payrolls rose by 199,000 in November, above forecasts for an increase of 180,000 and compared with a prior reading of 150,000. Employment was in part boosted by the return of automobile workers and actors after strikes.
"While job growth is falling compared to last year, it is holding up remarkably well in the face of a tough economic picture and slowing growth globally," said Richard Carter, head of fixed interest research at Quilter Cheviot.
"What this essentially does for the Federal Reserve is help to dampen down any talk of rate cuts in the first of half of 2024."
Germany's 10-year yield was last up 8 basis points at 2.274%, although was still on track to record its biggest biweekly fall since banking turmoil in mid-March, as money markets ramped up bets on future European Central Bank rate cuts. It hit 2.166% the day before, its lowest level since April 6.
Money market traders price in around a 60% chance that the ECB starts loosening policy in March next year, while around 140 basis points of easing is priced in through 2024.
Money markets had been pricing around 90 basis points of easing next year on Nov. 28 before Fed Governor Christopher Waller nodded to possible rate cuts in a matter of months.
Comments from Fed Chair Jerome Powell, ECB rate-setters Francois Villeroy de Galhau and Isabel Schnabel along with soft euro area data have done little to dissuade markets that looser ECB policy could start from the first quarter of next year.
However, some analysts remain sceptical about the repricing of the policy path.
"The recent decline in inflation is much less remarkable than may appear to be the case," said Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management, who forecasts the first ECB rate cut in the second half of 2024.
"Base effects have pulled the consumer price index (CPI) lower, but we are now likely to see this head back up again over the next few months, as these factors drop out of calculations."
Italy's 10-year sovereign bond yield, the benchmark for the euro area's periphery, rose 11 bps to 4.063%.
Investors will closely watch negotiations over the new European Union fiscal rules – the Stability and Growth Pact (SGP) - as the resilience of peripheral spreads could be in danger if investors already nervous about debt sustainability and high rates are spooked by tight post-pandemic budget rules.
France, Germany and the EU executive expressed hope on Friday that EU governments would reach an agreement.
Time is pressing because the new rules have to get the approval of the current European Parliament which will dissolve in April before European elections in June, with some analysts expecting a final agreement in second half of 2024.
Investors were also watching moves in Japan's 10-year government bond yield, which hit a three-week high overnight on growing speculation that the Bank of Japan (BOJ) would end its negative rate policy soon.
Japanese investors are large holders of foreign bonds, and some analysts have said a sharp rise in domestic yields could suck money back to Japan and out of global assets.
(Reporting by Stefano Rebaudo, editing by Angus MacSwan and David Evans) ;))