Feb 1 (Reuters) - Euro zone sovereign bond yields pared their gains on Thursday as U.S. economic data partly offset the impact of sticky service inflation in the euro area and Federal Reserve remarks that dashed expectations of quick monetary easing.
U.S. worker productivity grew faster than expected in the fourth quarter, keeping unit labour costs contained and helping the Fed in its fight against inflation.
Euro zone inflation eased last month but underlying price pressures subsided less than forecast, likely reinforcing the ECB's argument that rate cuts should not be rushed.
Germany's 10-year government bond yield, the benchmark for the euro area, rose 0.5 basis points (bps) to 2.16%. It was down more than 11 bps the day before, in its biggest daily fall in months.
"The biggest concern for policymakers is that services inflation has stopped falling – it has been unchanged at 4.0% since November," said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.
Figures "were a little stronger" than Capital Economics had expected after data from Germany and France released on Wednesday, he added.
Federal Reserve Chair Jerome Powell - speaking after the end of a two-day policy meeting - suggested the central bank will only cut rates with more evidence that inflation was moving towards the 2% target.
"We believe it will take a bit longer for the Fed to accumulate more evidence on inflation and get more clarity on how monetary policy transmission works its way through to the economy," said Anna Stupnytska, global economist at Fidelity International.
"The Fed is unlikely to be in the rush to cut until June, and once the cutting cycle starts, it will not be on autopilot - the pace of cuts will crucially depend on the growth/inflation mix at the time," she added.
ECB euro short-term rate (ESTR) forwards priced in a policy rate reduction of around 145 basis points (bps) in 2024 , down from 150 bps late Wednesday. They priced a 90% chance of a 25 bps cut by April 2024, after fully pricing it the day before.
Euro zone government bond yields dropped on Wednesday after mixed economic data and unexpectedly dovish comments from European Central Bank (ECB) policymaker Joachim Nagel.
The release of the Bank of England's (BoE) monetary policy summary, after its meeting, failed to trigger any price action in the bloc's bond market.
Italy's government bond 10-year yield - the benchmark for the euro area's periphery - was flat at 3.72%. The gap between Italian and German 10-year yields rose to 155 bps, its widest level since Jan. 23.
Bond prices of highly indebted countries have benefited from expectations of a quick monetary easing and the ECB's gradual wind-down of the Pandemic Emergency Purchase Programme (PEPP) reinvestments announced in December.
Bond prices move inversely with yields. (Reporting by Stefano Rebaudo; Editing by Peter Graff, Alex Richardson and Tomasz Janowski) ;))
