Eurozone Bonds Slump on Harsh Reality Check from October CPI

© Reuters.

By Geoffrey Smith — Eurozone bonds slumped on Friday, taking stock markets with them, as higher-than-expected inflation data from a number of countries dashed hopes of an imminent end to policy tightening by the European Central Bank.

rose an eye-watering 4.0% in Italy in October, a major acceleration from September’s 1.4% rise that took the year-on-year rate up to 12.8% under the EU’s harmonized methodology. 

also overshot expectations in France, where prices rose by twice the expected 0.5% due in part to the lengthy strike at the country’s refineries, which has pushed up the price of petroleum products.

Preliminary figures for Germany’s largest states also suggested that prices had risen by over 1% in the Eurozone’s largest economy.

Once again, the main culprit was household energy prices, which rose 8.5% from September in the benchmark state of North Rhine-Westphalia. The Federal Statistics Office Destatis will publish a preliminary nationwide number for Germany later Friday.

Only in was there a positive surprise, where prices rose a modest 0.1%. 

The numbers bore out ECB President Christine Lagarde’s warning on Thursday that inflation may yet have further to rise in the Eurozone as the effects of the summer surge in gas and electricity prices work their way through the economy.

Bond yields, which move inversely to prices, rose sharply in response to the numbers, as investors were forced into a rapid reassessment of their interpretation of Thursday’s ECB meeting. Markets had preferred to focus on a subtle softening in the Frankfurt-based central bank’s outlook for further , rather than on the latest 75-basis point hike in the bank’s key rates or the tightening of money market conditions through a retroactive change to the conditions of its past lending operations. 

Any suggestion of an imminent end to tightening was downplayed on Friday by Lithuanian central bank governor Gediminas Simkus, who told Bloomberg that another “substantial” hike is needed at the next meeting.

By 05:50 ET (09:50 GMT), the yield on the note was up 13 basis points at 1.93%, while its counterpart was up 15 basis points at 2.62%.

The , meanwhile, edged down 0.1% to $0.9955.