German bunds rally as August producer prices snap 6-month successive gains

The German bunds rallied Tuesday after recent data showed that the country’s producer price index fell for the first time in August after relishing continued 6-months of gains.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 1-1/2 basis points to 0.002 percent, the yield on long-term 30-year note dipped 4 basis points to 0.596 percent and the yield on short-term 2-year bond slid ½ basis point to -0.654 percent by 09:10 GMT.

German producer prices declined 0.1 percent in August, market expectation was for a monthly increase of 0.1 percent, following a 0.2 percent in the previous month. On an annual basis, it growth slowed to 1.6 percent from 2.0 percent previously reflecting the large decline in prices seen for August 2015.

According to Bloomberg, the European Central Bank will probably stay on hold until the end of the year as it waits for previous policy measures to take their full effect, according to unidentified. The report also says that the ECB has little interest in lowering its deposit rate further, but is unlikely to abruptly halt quantitative easing in March.

We continue to expect just an extension of QE to be announced in December and still would not rule out a final 10 basis points deposit rate cut if conditions worsen.

Moreover, the United States Federal Reserve in its meeting scheduled on September 20-21 and it is widely expected to leave its interest rates on hold, despite concerns that the strength of the world’s largest economy warrants a rise in borrowing costs. The September FOMC statement as a potential rude awakening for markets who have come to interpret 'data dependence' to mean everything has to be perfect for the FOMC to act.

Given the continued support from labour markets and gradual improvement in pricing measures, coupled with a closing window ahead of the November elections, September sets itself up as quite possibly the best time to act (particularly given that supportive data is not something that can be a guarantee come the December meeting).

Meanwhile, the German stock index DAX Index traded 0.45 percent higher at 10,421 by 09:10 GMT.