European Stocks Rise on ECB Rate Cut Anticipation, Focus on US Jobs Data

European stock markets rebounded on Monday, driven by investor optimism surrounding an expected interest rate cut from the European Central Bank (ECB). Simultaneously, government bond yields decreased, while attention shifted to U.S. jobs data as a key indicator of inflation trends.

The pan-European STOXX index experienced a 0.6% increase by 0850 GMT, aligning with gains in U.S. stock futures. U.S. 10-year Treasury yields fell by 4 basis points to 4.47%, while German yields, which had recently reached six-month highs, also declined.

Investors are anticipating a quarter-point interest rate cut by the ECB on Thursday, making it the first major central bank to lower rates in this cycle. However, a surprisingly high eurozone inflation reading last week has tempered expectations for aggressive rate reductions, with markets now pricing in fewer than 60 basis points of easing this year.

Meanwhile, encouraging news from China, where factory activity grew at its fastest pace in nearly two years in May, added to the positive sentiment. This data, coupled with the stable U.S. inflation figures released on Friday, contributed to the overall market optimism.

Market expectations for rate cuts by the Bank of Canada at its meeting on Wednesday have also increased, with an estimated 60 basis points of easing anticipated this year.

While investors are less confident about the Federal Reserve’s actions, the probability of a rate cut in September has risen following Friday’s inflation data. However, the odds of a second cut by December remain at 50%.

The outlook for U.S. interest rates could further evolve this week with the release of crucial data, including key surveys on services and manufacturing, as well as the May payrolls report. The latter is expected to show continued low unemployment and a moderate increase in new jobs.

In Europe, attention also focused on Standard & Poor’s downgrade of France’s credit rating, although the country’s bonds exhibited little reaction to this development.