Euro Zone Bond Yields Decline Amid Stalling U.S. Job Market

Euro zone government bond yields fell for the fourth consecutive day as U.S. jobs data confirmed a slowing market, setting the Federal Reserve up for a rate cut. Data showed the U.S. added 142,000 jobs in August, down from expectations. The mixed picture led to declining bond yields globally.

Euro zone government bond yields fell for a fourth consecutive day on Friday as data confirmed the U.S. jobs market is slowing down, positioning the Federal Reserve to cut rates later this month. The U.S. non-farm payrolls data released on Friday showed the economy added 142,000 jobs in August, compared to a downwardly revised 89,000 in July, and falling short of the 160,000 jobs economists had predicted.

The unemployment rate dipped to 4.2% from 4.3% in July. U.S. and European yields, which had already been trading lower, slipped further following the jobs report. Germany's benchmark 10-year bond yield fell six basis points (bps) to 2.158%, its lowest since weak U.S. jobs data sparked a stock-market sell-off and bond rally in early August. Yields move inversely to prices.

Michael Brown, senior research strategist at Pepperstone, stated, 'The August U.S. labour market report painted something of a mixed picture of the employment situation. All of this does little to clear up the debate over the size of the rate cut at the September Fed meeting.'

Data this week has indicated that the crucial U.S. economy is cooling, with job openings, private payroll growth, and manufacturing activity all falling, which has helped pull down global bond yields as investors position for rate cuts. The Fed is expected to lower borrowing costs later this month, though the market is split on whether it will be a 25 or 50 bp reduction.

Italy's 10-year yield fell six bps to its lowest since December at 3.51%. The gap between Italian and German bond yields is 135 bps. The size of the U.S. economy and importance of the dollar means American data has a significant influence on global markets and central banks.

Adding to the gloomy economic outlook, data showed German industrial orders dropped 2.4% in July, a much larger fall than the 0.3% decline economists had expected. Separate figures indicated that Euro zone second-quarter growth was revised lower to 0.2% quarter-on-quarter from 0.3%. Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was down six bps to 2.231%, its lowest since Aug. 5.

The European Central Bank meets next week and is widely expected to cut rates by 25 bps to 3.5%, though the future outlook remains uncertain. Money market pricing shows traders anticipate around 64 bps of cuts between now and 2025, up from about 59 bps at the start of the week.

(With inputs from agencies.)