Benchmark German bond yields for the euro zone fell from their highest levels in 17 years, on Wednesday, as traders held off, in light of the decline in energy prices, after they increased their bets on the European Central Bank raising interest rates due to inflation fears, and briefly placed a possibility of the deposit interest rate above 3.5 percent, earlier this week.
Markets are also awaiting the US Federal Reserve's decision on monetary policy, later today, while they are strongly betting that policymakers will raise interest rates by a quarter of a percentage point to a range between 3.75 and 4.00 percent, indicating further monetary tightening in the future, according to Reuters.
The 10-year German bond yield fell by 0.5 basis points to 3.53 percent, after reaching 3.5723 percent on Tuesday, its highest level since June 2009.
Energy prices fell, as Brent crude futures fell after a two-day rise that followed an unexpected and significant rise in US crude inventories, while gas prices fell by about 3 percent.
Market prices indicated that the deposit interest rate at the European Central Bank is expected to reach 2.86 percent by next December, compared to the current level of 2.50 percent. The markets also expect the interest rate to reach 3.37 percent, by November 2027, with a third increase fully calculated, and indicating a probability of approximately 50 percent to implement a fourth increase.
The European Central Bank raised interest rates last week for the second time this year. In an attempt to contain rising energy-induced inflation, he warned that price pressures may persist for a long time, raising bets on further monetary tightening.
On the other hand, some analysts believed that expectations of a rate cut went too far, noting that rising energy prices would likely put pressure on growth and contribute to calming inflation.
The two-year German bond yield, the most sensitive to interest rate movements, settled at 3.23 percent, after reaching 3.3123 percent on Monday, its highest level since September 2023.
The 10-year French government bond yield fell by one basis point to 4.49 percent, after recording 4.5531 percent on Tuesday, the highest level since September 2008.
The difference between French bond yields and German bonds, which are considered a safe haven, reached 96 basis points, after reaching 98.15 basis points on Tuesday, which is the widest difference since July 2012.
In contrast, the Italian 10-year government bond yield rose by 2.5 basis points to 4.21 percent, while the spread over German bond yields reached 87 basis points.
Copper prices rose slightly on Wednesday, recovering from their lowest level in more than 3 weeks, at a time when investors awaited the US Federal Reserve’s decision on interest rates, amid widespread expectations that they will be raised later today.
The 3-month price of copper on the London Metal Exchange rose by 0.53 percent to $14,158 per ton by 03:30 GMT, after touching $13,926 per ton on Tuesday, according to Reuters.
The most traded copper contract on the Shanghai Futures Exchange rose 0.64 percent to 107,610 yuan ($16,037.97) per ton.
Markets are currently pricing in a probability of more than 90 percent that the US Federal Reserve will raise interest rates by 25 basis points, compared to about 60 percent a week ago, in light of inflation continuing at high levels. High interest rates usually put pressure on economic growth, which is a negative factor for industrial metals.
The dollar maintained its trading near its highest level in two weeks, while oil prices remained above $100 a barrel, raising concerns about inflationary pressures.
Chinese brokerage Jinrui Futures said that lower copper processing fees, weak smelter profit margins, and low inventory levels provided support for the red metal.
There were also signs of improved actual demand in China, the world's largest copper consumer. The Yangshan copper premium, an indicator of Chinese demand for imported copper, rose to $110 a ton on Tuesday, the highest level since early August.
In contrast, copper stocks in warehouses registered with stock exchanges continued to rise. Copper stocks in London Metal Exchange warehouses increased to 249,225 tons as of Monday, while the cash copper price remained trading at a discount compared to the 3-month contract.
Copper stocks also rose in US COMEX warehouses for the second session in a row, reaching 768,098 short tons, equivalent to about 696,807 metric tons, as of Monday.
Copper prices fell from record levels recorded last week, after Reuters reported that the White House had not yet decided whether to impose customs duties on refined copper.
As for other metals on the London Metal Exchange, aluminum rose 0.20 percent, zinc rose 0.46 percent, lead 0.59 percent, and nickel rose 0.77 percent.
On the Shanghai Futures Exchange, aluminum rose 0.52 percent, zinc 0.56 percent, lead 0.41 percent, and tin 1.23 percent, while nickel fell 1.35 percent.
On Wednesday, the US Federal Reserve faces a double test, with markets awaiting the first interest rate hike in more than 3 years, at a time when inflation rates exceed the target, while President Donald Trump continues to press to reduce borrowing costs.
Markets are widely expected to raise the base interest rate by 25 basis points, which will raise the target range for the interest rate to about 3.75-4 percent. The potential move comes after data showed continued inflationary pressures, with the consumer price index rising 0.4 percent between July and August, and the annual inflation rate stabilizing at 3.4 percent.
Economists believe that Federal Reserve Chairman Kevin Warsh's statements in August largely paved the way for raising interest rates, after he stressed in a speech during the Jackson Hole conference that inflation is still higher than the 2 percent level targeted by the central bank, and that a faster decline in inflation will be necessary to avoid the need for additional tightening of monetary policy, according to what the Financial Times newspaper reported.
Olivier Quibion, professor of economics at the University of Texas at Austin, told the British newspaper that the Federal Reserve is significantly late in raising interest rates. Pointing out that inflation has been higher than the target for years, and that it is not moving towards the central bank’s target.
In a survey conducted by the University of Chicago Booth School of Business for the Financial Times, 50 out of 51 academic economists surveyed said that the cost of borrowing should rise from its current range of 3.5-3.75 percent. Most participants called for a 25 basis point hike, while 14 percent of them supported a larger increase of 50 basis points, due to concerns that increased fuel prices linked to the war with Iran would lead to wider inflation.
This comes at a time when price pressures are still much higher than the Fed’s target. The personal consumption expenditures price index, the central bank's preferred measure of inflation, reached 3.7 percent, against a target of 2 percent. Core inflation, which excludes food and energy prices, also rose to 3.3 percent in July, compared to 3 percent before the outbreak of the war with Iran, according to data reported by the Associated Press.
The challenge facing Warsh is not limited to the decision to raise interest rates; US monetary policy faces a test of its ability to influence market expectations regarding inflation and long-term interest rates.
The yield on 10-year US Treasury bonds exceeded the 5 percent level this week for the first time in 3 years, before falling slightly in Wednesday’s trading. Mortgage rates, which are highly influenced by long-term bond yields, also rose.
Diane Swank, chief economist at KPMG, believes that raising interest rates now may lead, paradoxically, to lowering long-term interest rates later, if the move helps restore market confidence in the Fed’s ability to return inflation to the 2 percent level. The Associated Press reported that failure to achieve this may push markets to tighten financial conditions themselves through higher mortgage rates, corporate borrowing costs, and government debt interest.
The sensitivity of the situation increases as energy prices continue to rise. High oil prices resulting from the war with Iran have increased pressure on inflation, while tariffs and huge investments in artificial intelligence infrastructure are adding other factors to price pressures, according to a Financial Times analysis.
On the other hand, Trump continues his calls for lowering interest rates, and he criticized the current borrowing costs and described them as “ridiculous,” while investors are awaiting how the US administration will deal with the expected decision to raise interest rates.
Kevin Hassett, director of the National Economic Council, said in an interview with Fox News, reported by the Associated Press, that Trump “will probably not be very happy” if the Fed raises interest rates, but he will defend Warsh’s independence.
The political pressure comes at a time when markets are trying to evaluate the extent of the central bank’s independence. Especially after Trump strongly criticized Warsh's predecessor, Jerome Powell, for not lowering interest rates as quickly as he had demanded.
In this context, Christine Forbes, a professor of economics at MIT Sloan College and a former official at the Bank of England, told the Associated Press that Warsh cares about his legacy and realizes that central bank presidents who respond to political pressures rather than economic developments are not viewed positively in economic history.
The most important question for markets remains whether the expected interest rate hike will be a single step, or the beginning of a new cycle of monetary tightening.
Markets are currently pricing in several additional interest rate increases, but economists are more conservative about the continuation of these increases through 2026, according to the Financial Times.
Jonathan Pingel, an economist at UBS, said that the Fed will not be forced to continue raising interest rates if upcoming inflation data show a decline in price pressures.
Sebnem Kalmi-Ozcan, a professor of economics at Brown University, said that Wednesday's decision is still - from her point of view - open to both possibilities, noting that Warsh may prefer to wait for more data in light of the uncertainty.
It is expected that the Federal Reserve's economic forecasts - if issued as part of the forecast package accompanying the decision - will provide indications of policymakers' vision of the path of inflation and interest rates, while the markets are also awaiting Warsh's statements regarding the next path of monetary policy.
