Eurozone inflation has reached its lowest level in nearly two years, while US price increases in the previous month were lower than expected. This has led to speculation that interest rate hikes in both the Eurozone and the US may come to an end. Bond markets have stabilized after a period of turmoil, with consumer prices in the Eurozone rising by 4.3%, below economists’ estimates of 4.5% and August’s rate of 5.2%. In the US, the Federal Reserve’s preferred measure of prices showed only a 0.1% increase in August, lower than anticipated. This suggests that the tightening cycle of interest rate rises may be reaching its conclusion.
Despite these developments, bond yields remain at near-decade-high levels. However, the recent data has provided some relief to the bond market, which has been shaken by the prospect of higher interest rates. Both German and US 10-year yields fell after the inflation news, indicating a positive market response. Economists and market analysts believe that the worst of the bond market rout may be behind us, and that the recent data could prevent interest rates from remaining high indefinitely.
While the decline in inflation in the Eurozone adds to expectations that the European Central Bank will end its series of interest rate increases next month, central banks are still indicating that they may raise rates again if price pressures return. Overall, there is cautious optimism that the recent data signals a potential end to the era of higher interest rates, leading to improved returns in the fourth quarter. However, economic headwinds and the possibility of a US government shutdown may still exert pressure on the Federal Reserve to increase rates in the future.