Government bonds fell on Tuesday after euro zone inflation data came in stronger than expected and rising oil prices intensified questions over how much central banks will raise interest rates. interest in curbing price growth.
In Europe, the yield on the 10-year German Bund – a gauge of borrowing costs in the EU – added 0.09 percentage point to 1.14%, extending a sell-off from the previous session after German inflation data also came out worse than expected. Italy’s equivalent yield increased by 0.15 percentage points. Bond yields rise as their prices fall.
US bonds also fell, with the yield on the benchmark 10-year Treasury rising 0.12 percentage points to 2.87%.
The moves came after new data showed on Tuesday that consumer price growth in the euro zone hit 8.1% in May, down from 7.4% in April and above economists’ expectations of 7, 7%. The rise in Treasury yields also followed the Memorial Day holiday on Monday, when U.S. stock and bond markets were closed.
For Jim Paulsen, chief investment strategist at The Leuthold Group, the EU agreement to ban most Russian oil imports was the main driver of the bond sell-off on Tuesday.
Brent crude, the international oil benchmark, rose 1.5% to $123.47, stoking concerns about even higher inflation and further interest rate hikes in the United States and in Europe, Paulsen added.
“[Rising energy prices] will feed [the US] the consumer price index and raise fears that inflation may not moderate as quickly as we thought,” he said. “That’s a change from last week and that’s what’s really hitting stocks and bonds.”
In equity markets, Wall Street’s S&P 500 fell 0.8% and the tech-heavy Nasdaq Composite fell 0.7%. Europe’s regional Stoxx 600 stock index fell 0.6%, while Germany’s Dax fell 1.2%.
Inflation that remains stubbornly high will put additional pressure on the European Central Bank to raise interest rates, said Kasper Elmgreen, head of equities at Amundi, Europe’s largest asset manager. “The direction of travel from a number of data points shows that inflation in Europe is surprisingly on the upside. We have yet to see the top.
Ahead of Tuesday’s European inflation data, Philip Lane, the ECB’s chief economist, said interest rate hikes of a quarter of a percentage point in July and September would be his “benchmark pace”. . He noted in an interview with Spanish business newspaper Cinco Días that the process of withdrawing stimulus “should be gradual.”
The prospect of higher interest rates and slower growth creates an “anti-Goldilocks” scenario for markets where neither bonds nor equities are attractive, says Hani Redha, multi-asset strategist at PineBridge Investments.
Elsewhere in equities, Hong Kong’s Hang Seng index gained 1.4%, after data showed Chinese manufacturing activity in May contracted at a slower pace than the previous month. The official manufacturing PMI rose to 49.6 from 47.4 in April. Any reading below 50 signals a contraction.
Shanghai also announced a partial relaxation of some of its coronavirus lockdown restrictions on Monday evening.