Investors Brace for Key Economic Data and Central Banker Meeting

Euro zone government bond yields remained steady as investors anticipated a week filled with significant economic data and a central banker meeting in Jackson Hole. Analysts are expecting market volatility and a reality check towards the end of the week. Key focus will be on euro zone business activity figures, wage growth data, and potential central bank rate cuts.

Euro zone government bond yields remained steady on Monday as investors anticipated a week filled with significant economic data and a meeting of central bankers at Jackson Hole. Key attention will be directed towards euro zone business activity figures and wage growth data due later this week, which the European Central Bank will consider before making its rate decision in September.

Germany's 10-year government bond yield, the benchmark for the euro zone bloc, held stable at 2.256%. Analysts suggest that markets may experience a reality check later this week, following recent volatility, as both investors and central bankers return from holidays.

Euro area borrowing costs have been influenced by perceptions of risks in the U.S. economy, with U.S. Treasury yields slightly lower on Monday, continuing to reverse the significant rise observed last Thursday. This comes as investors processed data that showed a resilient U.S. consumer market. Ralf Pressuer, rate strategist at BofA, commented, "The next few weeks will likely determine whether the Federal Reserve ends up cutting rates by 50-75 bps this year or by 150 bps or more."

The Jackson Hole conference presents an opportunity for the Fed to counteract the implied possibility of a 50-bps cut at one of the remaining three meetings of the year. Pressuer added that pricing in less than 75 bps for the remainder of 2024 requires confirmation that July's labor market report was indeed affected by weather, along with sustained strength in ISM services.

Further economic data weakness could prompt traders to price in successive 50-bp cuts. Markets are currently discounting 95 bps of cuts by year-end. A decline in euro zone countries' August flash PMIs, due on Thursday, could diminish hopes for a growth rebound in the euro area, potentially leading to downward revisions of the ECB's growth forecast profile, according to Barclays.

An upside surprise in the second quarter euro area negotiated wages indicator could stir fresh concerns around inflationary effects. Money markets have priced in around 65 bps of ECB rate cuts in 2024, suggesting two 25-bps moves and about a 60% probability of a third cut.

Investors will closely analyze comments from ECB speakers regarding the growth outlook amid rising risks to economic activity, particularly in Germany. The spread between U.S. and German borrowing costs was at 162 bps, hitting a 12-month low of around 153 bps earlier this month. Meanwhile, Italy's 10-year yield dropped 2 bps to 3.626%, with the yield gap between Italian and German bonds at 136 bps.

(With inputs from agencies.)