August 12, 2016 / 11:10 AM / 4 years ago

UPDATE 2-Weak U.S. data pushes investors back into euro zone bonds

(Adds U.S. data, updates prices)

By John Geddie and Abhinav Ramnarayan

LONDON, Aug 12 (Reuters) - The yield on the euro zone benchmark bond, the 10-year German Bund, fell on Friday after poor U.S. economic data reduced the prospects of a Federal Reserve rate hike in the near future.

Unexpectedly flat U.S. retail sales and a drop in the producer price index pushed euro zone bond yields lower on the day.

“The data was viewed by markets as taking any pressure away from the Fed to hike rates this year,” said Victoria Clarke, an economist at Investec.

“There’s a level of uncertainty because of the U.S. elections in November, which technically the Fed should not be considering - so the (retail sales figure) provides another piece of data for (Fed Chair Janet) Yellen to hide behind,” she said.

Traders are pricing in a 41.6 percent chance of a rate hike in December, down from 45 percent on Thursday, according to CME Group’s FedWatch tool.

Initially, Thursday’s almost-5 percent rise in oil prices and support from San Francisco Federal Reserve chief John Williams for a rate rise this year pushed yields higher.

Bonds are sensitive to sharp moves in crude prices because of the potential implications for inflation.

The likelihood that price growth is accelerating was one of the reasons Williams gave in an interview on Thursday in which he called for tighter monetary policy in the United States.

The Fed raised rates last December for the first time in nearly a decade, but did not continue to lift them as anticipated, to cushion the economy from a slowdown in China and head off another round of financial market turmoil.

The German 10-year yield rose 2 basis points to minus 0.14 percent in early trading on Friday morning, but after the release of the U.S. retail sales data it retreated to minus 0.17 percent, down 1 bps on the day.

Most other euro zone yields followed suit and were largely set to end the day flat or slightly lower.

Euro zone second-quarter growth data was a mixed bag: overall growth fell in the second quarter to 0.3 percent, although the slowdown in Germany, to 0.4 percent, was less pronounced than economists had forecast.

Italy’s output was flat, compared with expectations of 0.2 percent growth, piling pressure on Prime Minister Matteo Renzi before a referendum on constitutional reform.

Italian 10-year yields rose as high as 1.08 percent before retreating to end dwon 1.4 bps at 1.05 percent.

“Italy is already under a bit of pressure with the banking situation and the Senate referendum and what that means for Renzi,” said Owen Callan, an analyst at Cantor Fitzgerald.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Andrew Roche)

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