Government bonds saw a rally on Tuesday as euro zone inflation data bolstered expectations for quicker rate cuts from the European Central Bank (ECB). Meanwhile, the U.S. dollar strengthened following comments from Federal Reserve Chair Jerome Powell, which tempered bets on a significant U.S. rate cut.
Euro zone inflation fell to 1.8% in September, below the ECB’s 2% target, prompting traders to reassess the likelihood of an ECB rate cut at its upcoming meeting. This led to a decline in Germany’s 10-year bond yield, which dropped over 8 basis points to its lowest since January, while U.S. Treasury yields fell by 6 basis points to 3.74%.
Citi’s Michael Brown noted that markets are increasingly pricing in a 25 basis point rate cut at the ECB’s October 17 meeting, up from expectations just a week prior. In contrast, Powell indicated that the Fed is likely to maintain more gradual cuts, with traders now assigning a 40% probability to a 50 basis point cut in November, down from 53%.
European stocks saw modest gains, with the STOXX 600 index rising 0.4%, while U.S. stock futures showed mixed results. In commodities, oil prices declined despite escalating tensions in the Middle East, as the market remained focused on supply and demand dynamics. Brent crude futures fell 0.7% to $71.23 per barrel.
France’s government bonds outperformed, with yields dropping significantly, aided by the announcement of planned tax hikes to address the country’s budget deficit. The Japanese yen steadied against the dollar, while Japan’s Nikkei index rebounded, rising nearly 2% after a sharp decline the previous day. Additionally, spot gold rose 0.6% to around $2,650 per ounce, close to its recent record high.