Sluggish Q2 economic growth drives Eurozone periphery bonds higher; ECB policy decision in focus

The Eurozone periphery bonds gained Tuesday after recent data showed that the economic growth slowed in the second quarter of 2016, which increased possibilities of a further monetary policy easing.

The French 10-year bonds yield fell 3 basis points to 0.148 percent, Irish 10-year bonds yield dipped 2-1/2 basis points to 0.395 percent, Italian equivalent inched 3-1/2 basis points lower to 1.119 percent, Netherlands 10-year bonds yield slid 2 basis points to 0.035 percent, Portuguese equivalents ticked 3 basis points lower to 3.022 percent, Spanish 10-year bonds yield tumbled 4-1/2 basis points to 0.961 percent by 10:00 GMT.

The third reading of the second-quarter Eurozone GDP growth estimate is reaffirmed once again at 0.3 percent q/q, same as its first two estimates and identical to what was predicted by the market consensus and proving that the downward revision to Finland's second-quarter GDP growth rate to zero q/q from 0.3 percent previously recorded was too small to have any effect.

The annual rate is also unchanged, at 1.6 percent y/y, and we continue to expect a shift down in gear in average quarterly GDP growth in the second half of 2016 from an average 0.4 percent per quarter in the first half, to an average 0.25 percent to 0.3 percent per quarter in the second half.

The second quarter GDP estimate comes a day ahead of the ECB’s September policy meeting, which is scheduled to take place on Thursday at 11:45 GMT. Moreover, it is widely expected that the president Mario Draghi is unlikely to announce any rate cut and major stimulus measures.

On the contrary, we foresee that there is a possibility that the central bank could opt for a small deposit rate cut given the weakness in the economies.

Meanwhile, the pan-European STOXX 600 index was up 0.11 percent and the euro-area blue-chip gauge, the PSI20 Index fell 0.20 percent at 4,769.50, the STOXX 50 climbed 0.24 percent. The DAX trading 0.35 percent higher and the CAC-40 jumped 0.16 percent by 10:00 GMT.