Boost for bonds as European data suggests rate cuts

Bonds surged after business activity across Europe encountered an unexpected setback, prompting traders to amp up wagers on monetary easing. 

The yield on Germany’s benchmark 10-year bonds fell six basis points, dragging the rate on US Treasuries lower, after manufacturing and services PMI readings for Europe’s two biggest economies fell short of expectations. A separate index for the whole of the euro-zone also dropped more than forecast in June. Traders now see a second ECB cut by October and an 80% chance of a third this year, up from about 65% on Thursday.

Gilts also jumped, boosted by a UK PMI reading that showed private sector companies reported slower growth than expected. Money markets are now fully pricing two quarter-point cuts in 2024 and the BOE hinted it was nearing a first move after a monetary-policy meeting on Thursday.

The euro slipped as much as 0.3% to $1.0671, its lowest in a week. The currency has been under pressure since French President Emmanuel Macron’s surprise decision to call a snap election after his party’s poor performance at the European Parliament elections, sliding from around $1.09.

“The French PMIs are out and we’re maybe getting the first glimpses of the contagion from the political turmoil to the real economy,” said Valentin Marinov, head of G-10 foreign-exchange research and strategy at Credit Agricole. The positive impact from the Euro 2024 football tournament, which is being hosted by Germany, seems to be “already starting to fade as well,” he said. 

The pound is also taking a hit from growing expectations that rate cuts are imminent, falling to a five-week low versus the dollar. It has lost around 0.3% so far this week, putting it on track for its third straight week of losses.