The European Central Bank will almost certainly deliver a second interest-rate hike this week, throwing the focus onto how open officials are to a third step later in the year, according to Bloomberg. In a move set to reaffirm the ECB as the most hawkish central bank among the Group of Seven, a quarter-point increase on Thursday has been widely signaled, with the debate already shifting to the need for another one. Fresh from their long summer break and armed with new quarterly forecasts, policymakers in a region still highly dependent on energy imports are confronting both the persistence of west asia hostilities and renewed increases in fuel costs. Recent data showed euro-zone inflation jumped in August to 3.3%, the fastest pace in almost three years and noticeably above the 2% target, with an unexpected slowdown in the core measure offering some comfort to officials.
Eurozone government bond yields remained near multi-year highs on Tuesday as investors weighed rising energy prices, political uncertainty in Germany and renewed volatility in Japan ahead of this week's European Central Bank policy meeting, according to Reuters. Germany's 10-year government bond yield, the benchmark for the euro zone, was little changed in early trading at around 3.38%, remaining close to last week's 15-year high. France's 10-year yield was unchanged at 4.25%, remaining close to its highest level since 2008, while Italy's 10-year yield slipped 1 basis point to 4.20%. Shorter-dated German yields edged lower, with the two-year yield down 1 basis point at 2.98%. The ECB's policy meeting on Thursday is the key event for euro zone bond markets this week, with attention focused on whether policymakers will provide clues about the future path of monetary policy.
Oil prices climbed by more than $1 a barrel following fresh US-Iran attacks involving vessels in the Strait of Hormuz and other areas, intensifying inflation concerns and strengthening expectations that the European Central Bank could raise interest rates later this week, as reported by Reuters. Brent crude oil has moved closer to $100 a barrel, while Dutch benchmark wholesale gas prices have risen to their highest levels since late 2022. Energy stocks gained 1.2% as the rise in oil prices has renewed concerns about inflation, potentially increasing pressure on central banks to maintain or tighten monetary policy. Brent crude futures hovered near six-week highs and moved closer to $100 a barrel as strikes on vessels in the Strait of Hormuz and elsewhere heightened fears of prolonged supply disruptions. The escalating conflict has added to the case for continued monetary tightening, with policymakers now facing a more difficult inflation environment if elevated energy costs persist.
Deutsche Bank has raised its peak ECB interest rate projection to 2.75%, forecasting additional 25 basis point hikes in September and December, as reported by Reuters. The bank's research arm had previously forecast the ECB's deposit facility rate would peak at 2.5%, only modestly above its current level of 2.25%. Those assumptions are now being challenged, as Deutsche Bank noted in a research note on Friday. The bank now considers 2.75% the more likely terminal rate for the ECB, though it said rates could peak at 2.5% if geopolitical tensions ease more quickly than expected or economic growth weakens. Deutsche Bank now expects the ECB to follow a September move with an additional quarter-point increase in December, while traders are still pricing in another increase by year-end and one more in 2027. A move above 3% would require broader evidence of persistent inflationary pressures, according to the bank.
Political developments in Germany have also added to market uncertainty, with the far-right Alternative for Germany (AfD) securing a historic victory in a state election over the weekend, raising fresh questions about the country's political landscape and its potential implications for Europe's largest economy, according to Reuters. Germany's DAX fell 0.2% over the weekend, with the country's far-right AfD topping a state election in Saxony-Anhalt with 44% of the vote, dealing a major blow to Chancellor Friedrich Merz. Euro zone investor morale rose to its strongest reading in more than four years in September, while second-quarter GDP expanded 0.6% from the previous quarter and 1.2% year on year, both above expectations. Energy shares gained 1.2%, tracking higher oil prices, with fiscal concerns ahead of next year's election sending French stocks to two-month lows last week, though the stock index was up 0.3% on Monday.
