Fed Rate Cut Prospects Shake Euro Zone Yields Amid Rising U.S. Inflation

Euro zone bond yields retreated after U.S. inflation data met expectations, boosting chances of a Federal Reserve rate cut in December. The U.S. CPI rose 2.6% annually in October. European markets are pricing in a lower ECB terminal rate due to mixed structural and cyclical economic issues.

Euro zone bond yields pulled back from earlier highs on Wednesday as U.S. inflation data pointed towards a potential Federal Reserve rate cut. The U.S. consumer price index rose by 0.2% in October, matching expectations and pushing traders to increase bets on a December rate cut.

The chances of a 25 basis point reduction shot up to 80% from 60%, according to CME's FedWatch tool. However, the same data had a more limited impact on the European Central Bank's monetary policy outlook. Market expectations for the ECB's deposit rate were marginally adjusted, reflecting concerns about weak European economic data.

Germany's government bond yields reflected this, with the 2-year yield rising slightly. Analysts highlighted structural issues in Europe, such as high energy costs and low productivity, as contributing factors. Meanwhile, Germany's CDU leader, Friedrich Merz, expressed willingness to discuss potential reforms to the country's debt brake under specific conditions.

(With inputs from agencies.)