Government bonds drop as eurozone inflation hits new record

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Government debt markets came under fresh selling pressure on Tuesday after hotter than expected eurozone inflation data intensified questions about how far central banks will raise interest rates to curb price growth.

In Europe, the yield on Germany’s 10-year Bund — a proxy for borrowing costs across the EU — added 0.08 percentage points to 1.12 per cent, extending a bout of selling from the previous session after German inflation data also came in worse than expected. Italy’s equivalent yield rose 0.13 percentage points.

US bonds similarly dropped, with the yield on the 10-year Treasury note climbing 0.12 percentage points to 2.86 per cent as the price of the global benchmark instrument slid.

Those moves came after fresh data on Tuesday showed that eurozone consumer price growth reached 8.1 per cent in May, up from 7.4 per cent in April and higher than economists’ expectations of 7.7 per cent. The rise in Treasury yields also followed the Memorial day holiday on Monday, when US equity and bond markets were closed.

Kasper Elmgreen, head of equities at Amundi, Europe’s largest asset manager, said: “The direction of travel from a number of data points shows inflation in Europe is surprising on the upside. We haven’t seen the peak yet. It’s something the European Central Bank will have to address.”

Ahead of the inflation data release, Philip Lane, chief economist of the European Central Bank, had said that quarter-percentage-point interest rate rises in July and September would be the central bank’s “benchmark pace”. He noted in an interview with Spanish business newspaper Cinco Días that the process of withdrawing stimulus “should be gradual”.

In equity markets, Wall Street futures pointed to a lower open with contracts tracking the S&P 500 slipping 0.8 per cent and those tracking the tech-heavy Nasdaq 100 dropping 0.6 per cent. Europe’s regional Stoxx 600 stock index was down 0.5 per cent by mid-afternoon, while Germany’s Dax was down 1 per cent.

In commodities, Brent crude rose 1.7 per cent to $123.71 a barrel after the EU agreed a ban on most Russian oil imports. The international oil benchmark had climbed above $120 a barrel on Monday for the first time since March.

This provided further momentum for European oil stocks, with Shell and BP up 1.4 and 1.2 per cent respectively. The energy-heavy FTSE 100 rose 0.2 per cent.

“This is the story of the day,” said Elmgreen. “But the bigger picture is the Russian invasion of Ukraine put a significant risk premium on a range of commodities. In the long term, agricultural commodities will join energy, with food price rises on the horizon.”

Elsewhere in equities, Hong Kong’s Hang Seng index gained 1.4 per cent, after data showed China’s manufacturing activity in May contracted at a slower pace than the previous month. An official manufacturing purchasing managers’ index rose to 49.6, up from 47.4 in April. Any reading below 50 signals a contraction.

Shanghai on Monday evening also announced a partial easing of some of its coronavirus lockdown restrictions.

The dollar index, which measures the currency against six others, added 0.6 per cent, while the euro and the pound fell 0.8 per cent and 0.7 per cent respectively against the US currency.

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