Bunds Drop After Europe CPI With Focus Now on US – Europe Market Wrap

German government bonds sank, while equities made little changes, as euro-area inflation rose faster than expected, potentially limiting the space for interest rate reduction.

Ten-year bund rates jumped five basis points after European data showed consumer prices up 2.6% year on year in May.

Traders maintained their betting for a rate drop at the European Central Bank meeting next week, but reduced their bets on further easing. The Stoxx 600 was barely changed, as US equity prices dipped down.

ECB officials have warned of an uneven path as inflation declines. Meanwhile, the core PCE deflator, which the Fed prefers to use to measure inflation, is anticipated to have eased in April to its weakest monthly pace this year.

Stock gains this month were spurred by a rebound in technology as well as Fed Chair Jerome Powell’s dovish stance on interest rates at the beginning of May. That optimism has dissipated over the course of the month, but Friday’s report may reignite prospects for easing if inflation returns to goal.