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Bond yields, euro tumble on weak PMIs

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Investors ramp up ECB rate cut bets

By Stefano Rebaudo and Dhara Ranasinghe

Nov 22 (Reuters) - German short-dated government bond

yields fell to multi-year lows, while the euro tumbled to

two-year lows on Friday as markets ramped up European Central

Bank rate cut bets after data showed a sharp decline in euro

area business activity.

Business activity in the euro zone took a sharp turn for the

worse this month as the bloc's dominant services sector

contracted and manufacturing sank deeper into recession, a

survey showed on Friday.

France slowed at the sharpest pace since early this year,

while Germany's business activity fell for a fifth month running

and at the quickest rate since February.

The reaction from investors was swift as they drove euro

zone government bond yields down on expectations of further ECB

rate cuts. The euro briefly fell as much as 1%.

Money market pricing suggested that investors now price more

than a 50% chance of a 50 basis point (bps) rate cut at the

ECB's December meeting, up from 20% before data.

A 25 bps cut is fully discounted.

Traders also priced in an ECB deposit facility rate at

around 1.80% in July, down from 1.95%

before PMI figures.

"Markets are reacting because they think the ECB needs to do

more," said Frederik Ducrozet, head of macroeconomic research at

Pictet Wealth Management, adding that he still expects the ECB

to cut by 25 bps in December.

Germany's 2-year bond yields, more sensitive to

expectations for the ECB policy rates, hit 1.98%, its lowest

level since December 2022.

Bond yields were down across the euro area with Italian

2-year yields 9 bps lower at 2.49%.

Bank stocks, which have benefited from higher

interest rates since 2022, fell as much as 2.1% as markets moved

to price in more rate cuts from the ECB following the weak PMI

data.

The pan-continental STOXX 600 index was up 0.4% on

the day as of 10:08 GMT, having been higher by 0.75% before the

data.

Markets are also closely watching developments on the

geopolitical front, as investors have bid for safe-haven

government bonds.

Russia fired a hypersonic intermediate-range ballistic

missile at the Ukrainian city of Dnipro on Thursday. North

Korean leader Kim Jong Un has accused the United States of

ramping up tension and provocations, saying the Korean peninsula

has never faced a greater risk of nuclear war, state media KCNA

said on Friday.

Germany's 10-year yield, the benchmark for the

euro area, was down 6.5 bps at 2.25%, after hitting its lowest

level since October 21. It was up 2 bps before the data.

(Reporting by Stefano Rebaudo and Dhara Ranasinghe; additional

reporting by Samuel Indyk. Editing by Elisa Martinuzzi.)