European government bond yields edged higher on Wednesday, ending a two‑day rally as traders priced in a near‑certain 25‑basis‑point rate increase at the European Central Bank meeting on Thursday. German 10‑year Bund yields hovered around 3.36%, while Italy’s two‑year yields remained firm, reflecting heightened expectations of tighter monetary policy.
The shift follows data showing Eurozone headline inflation accelerating to 3.3% year‑on‑year in August, driven largely by a 14.3% jump in energy prices. Core inflation eased slightly to 2.4%, but the overall trend keeps pressure on the ECB, whose governing council, led by President Christine Lagarde, is expected to act decisively.
Across the Atlantic, U.S. labor market data added to the macro backdrop. The Bureau of Labor Statistics reported 162,000 jobs added in August, while a forthcoming Consumer Price Index release later this week is set to influence expectations for a Federal Reserve rate hike at its September 15‑16 meeting.
Equity markets reacted modestly, with the pan‑European STOXX 600 index slipping 0.1%. Meanwhile, geopolitical developments in the Middle East lifted oil prices. Iranian authorities announced plans to establish a restricted zone outside the Strait of Hormuz, a chokepoint that handles roughly 20% of global seaborne oil and gas. In response to an IRGC missile attack on two U.S. Navy warships, U.S. forces struck three Iranian oil tankers, further tightening supply concerns.
Crude benchmarks rose another 0.2% on Monday, extending a near‑10% weekly rally. Brent crude pushed past $90 a barrel, with futures quoted at $97.99 later in the session, underscoring the market’s sensitivity to regional tensions and supply‑risk premiums.
Overall, the convergence of higher inflation readings, solid U.S. employment numbers, and escalating Middle‑East risks has reinforced expectations of tighter policy in Europe and buoyed commodity prices, setting the tone for the coming days of market activity.
