German bond yields surge

The euro has strengthened further as it continues to be buoyed by Germany’s promise to increase government borrowing and spending to boost its economy. It is trading at $1.08 against the dollar and not far shy of £0.84 against sterling this morning, ahead of the ECB’s latest interest rate announcement later today. The pound has also risen further against the dollar to around $1.29. The ECB looks set to lower the deposit rate by another 25bps to 2.5%, though the market has pared back the chances of further cuts beyond today with less than 50bps now priced in for the remainder of this year.

The prospect of increased government borrowing led to an extraordinary surge in German bond yields yesterday with 5- and 10-year yields rising by 20bps and 30bps respectively, while yields in other Euro area countries followed most of the way higher. UK yields also headed north, increasing by around 15bps in the 10-year area, while US yields ended flat to marginally higher on the day. Germany is leading a further increase in yields at the start of play today.

In equity markets, European stocks partially reversed Tuesday’s sharp fall, ending the day with gains of almost 2%, and they are advancing again this morning (up almost 1%). US stocks also finished in the black yesterday, with the main indices up 1% to 1.5%.

There was a mixed bag of economic data in the US yesterday. The ISM index of services activity nudged up in February but over the first couple of months of this year is running below its level in the final quarter of last year, pointing to a moderation in the pace of growth in this sector of the economy. Private sector employment rose by 77k last month according to the ADP report, much less than the 140k increase expected and down from a gain of 186k in January. The official employment (payrolls) data for February will be published tomorrow.

As well as the ECB meeting, economic data due today include retail sales in the Euro area; the construction PMI in the UK; and Q4 productivity and labour costs and the regular weekly jobless claims in the US.