Risk appetite in the eurozone is healthy and helping yields up from the back end. Monday’s eurozone PMI numbers impressed markets and today the German Ifo survey was also slightly better than expected. Germany remains a drag on the overall eurozone growth outlook, but most indicators seem to point towards a careful recovery. And with escalation fears fading in the Middle East, markets have their reasons to take on risk. The upward direction in rates was in line with the pushback from Bundesbank President Nagel, who emphasised that a June cut would not necessarily be the start of a series of cuts.
The upbeat risk sentiment was also reflected in the robust demand for Greece’s 30-year bond sale on Tuesday. The syndication benefitted from an S&P outlook upgrade from stable to positive just last week, on the back of tight fiscal policy and a positive growth outlook. The interest in the sale is especially clear when comparing the total orders of €33bn to just the €3bn size of the offering. At a spread versus Bunds of 127bp, the pricing is now well below the high in 2022 of 313bp.
Euro rates will probably take a passenger seat in the rest of the week as the US PCE reading will decide the direction for USTs. Market pricing still indicates close to three ECB cuts for 2024 versus just two cuts in the US. The PCE remaining elevated could lead markets to reconsider the spillovers from a scenario where the Fed holds longer/cuts less. The ECB stresses their independence from the Fed, but markets will still correlate the number of cuts for 2024 with the Fed’s path.