Euro zone yields rise as inflation set to hit record high

Consumer price growth in the 19 countries sharing the euro accelerated to 10.7% in October from 9.9% a month earlier, far outstripping expectations in a Reuters poll for 10.2%.

Inflation excluding unprocessed food and energy accelerated to 6.4% from 6.0%, while an even narrower measure that also filters out alcohol and tobacco rose to 5.0% from 4.8%.

Euro zone government bond yields had opened higher after red-hot national inflation readings were released on Friday. Yields move inversely to prices.

By 0404 GMT, Germany’s 10-year yield, the benchmark for the euro area, was up 7 basis points (bps) to 2.162%. The two-year yield was up 4 bps to 1.964%. The 10-year yield jumped by 11 bps on Friday as data showed German inflation surged to 11.6% in October, well above expectations and up from 10.9% the previous month.

The readings point to further rate increases from the ECB in an attempt to bring inflation back down towards its target. That’s despite many investors dialling down their expectations for future hikes after the ECB last week highlighted concerns about the strength of the economy as it raised rates by 75 bps.

The data is “keeping the market on its toes,” Rainer Guntermann, interest rate strategist at Commerzbank, said.

“The market is torn between the early indications from central banks that they might slow down the pace of interest rate hikes, but on the other hand the data is not really playing into this picture.”

Money markets are pricing in a 50-bp rate hike at the December meeting, with around 140 bps of further tightening priced in for this cycle, according to data from Refinitiv.

On Sunday, ECB governing council member Klaas Knot helped push back expectations for a slower pace of tightening, saying it was likely the next hike would be between 50 and 75 bps.

Italy’s 10-year government bond yield rose 16 bps to 4.316%, pushing the spread between Italian and German 10-year yields wider by 9 bps to around 214 bps.

Eyes were also on the inflationary impact of Russia suspending participation in a U.N.-brokered Black Sea grain deal.

Chicago wheat futures rose 4% on Monday as Russia’s withdrawal from the agreement raised concerns over global supplies.

“Food inflation has been a big deal and any decline in grain shipments from Ukraine is not going to help the inflation issue,” said Lyn Graham-Taylor, senior rates strategist at Rabobank.

Looking further ahead, investor focus looks set to turn to the Federal Reserve policy meeting on Wednesday. The Fed is likely to raise rates by 75 bps at the meeting but is seen slowing the pace of hikes from December.