German bunds rise modestly after Bundesbank cut economic, inflation forecast

The German bunds traded modestly firmer on Friday after the Bundesbank lowered its economic growth and inflation forecast in its June report. Also, investors were cautious ahead of the latest jobs data.

The yield on the benchmark 10-year bonds, which moves inversely to its price fell ½ basis point to 0.108 percent, yield on short-term 2-year bonds dipped ½ basis points to -0.520 percent and supper-long 30-year bonds yield tumbled more than 1 basis point to 0.798 percent by 09:20 GMT.

The German central bank (Bundesbank) lowered its economic growth and inflation forecast in its latest report, it cut 2016 GDP forecast to 1.7 percent, as compared to 1.8 percent forecast in December. For 2017 it reduced GDP forecast to 1.4 percent, from 1.7 percent in its previous estimates, for 2018 growth it made an initial forecast of 1.6 percent.

Similarly, it lowered the 2016 inflation forecast to 0.2 percent, from 1.1 percent in December, 2017 inflation forecast was also lowered to 1.5 percent, as compared to 2.0 percent in its earlier forecast and for 2018 it made an initial forecast of 1.7 percent.

The US May Labor Department employment situation report will be released on Friday at 12:30 GMT. We expect non-farm payrolls will increase +180k in May, on the contrary, the market is expecting an increase of +165k, as compared to +160k reading seen in April, alongside a decrease in the unemployment rate to 4.9 percent, investors consensus are for a 4.9 percent result.

Moreover, the focus will likely be paid to gains in total private employment which we expect will increase around +175k. Beyond the headline, we expect average hourly earnings will increase +0.2 percent m/m, alongside no change in weekly hours of 34.5. On balance, despite the notable weakness seen in recent months, we anticipate further improvement taking hold in the coming months as conditions gradually improve.

In addition, The European Central Bank, at its policy meeting yesterday, left interest rates unchanged, while sounding cautious on the outlook for the Eurozone, which faces downside risks from global threats, especially the "Brexit" referendum.

The ECB left the rate on bank overnight deposits at -0.4 percent, the main refinancing rate at 0.00 percent and the rate on the marginal lending facility at 0.25 percent.

ECB President Mario Draghi in his speech at the policy meeting on Friday, warned investors of a possible threat if a 'vote out' comes in for Britain, while he also left the door open to adopting possible action if inflation remains below target. This, in fact, seems a strong possibility, given the ECB’s latest forecasts.

Meanwhile, the German stock index DAX Index rose 0.49 percent at 10,258 by 9:20 GMT.