Investors expect ECB rate-hike pause in September after dismal PMIs

investing.com:

By Yoruk Bahceli

(Reuters) — Traders on Wednesday firmed up bets that the European Central Bank would pause hiking interest rates in September, as sharp contractions in business activity pointed to deepening economic pain in Europe.

Traders now price in a roughly 40% chance of a 25 basis point move in September compared with a more than 50% chance they saw only on Tuesday.

That suggests they are leaning towards a pause in the ECB's record-paced tightening cycle that has lifted rates from deep in negative territory to 3.75% in just a year.

German business activity contracted at the fastest pace in over three years in August and much more than analysts expected, data showed on Wednesday, deepening the downturn in business activity far more than thought across the euro zone. Britain's business activity meanwhile contracted unexpectedly, raising recession risks.

Bond yields in the euro zone and Britain, recently propped up by a resilient U.S. economy, tumbled. The euro fell to more than a two-month low against the dollar and sterling dropped sharply as investors also scaled back their expectations for where ECB and Bank of England rates will peak.

«The PMI suggests that it's back to the pre-summer narrative of lower rates,» said Danske Bank chief analyst Piet Christiansen.

Germany's 10-year Bund yield, the benchmark for the euro area, dropped as much as 13 basis points to 2.52%, the lowest since Aug. 10. Two-year German yields, sensitive to interest rate expectations, dropped similarly below 3%.

Hit by the receding rate hike expectations, the euro fell to as low as $1.0804, extending its losses against the dollar this month to 1.7%. It is set for its biggest monthly drop since May.

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