Euro zone investors look for clues as Fed minutes show no clear path for interest rates

LONDON (Reuters) - Euro zone government bond yields edged lower on Thursday after minutes from the Federal Reserve showed policymakers were deeply divided over the path of interest rates, and ahead of euro zone inflation data later in the session.

FILE PHOTO: 20 Euro banknotes are seen in a picture illustration, August 1, 2016. REUTERS/Regis Duvignau/Illustration

The Fed, which sets the tone for monetary policy globally, cut rates by 25 basis points at its last meeting, but was anything but unanimous on how to respond to slowing growth in the U.S. economy, with most policymakers favouring keeping rates unchanged.

They were however united in wanting to signal they were not on a preset path to more cuts, a message not likely to sit well with U.S. President Donald Trump.

The minutes offered “nothing to suggest that policymakers felt the need to use the FOMC minutes to send a more dovish signal despite an escalation of the trade war and deeper inversion of the yield curve since the July meeting,” wrote analysts at NatWest Markets in a note published on Thursday.

Global central bankers meet at Jackson Hole, Wyoming, for their annual gathering on Friday, and markets will be eagerly awaiting any signals from there.

German bund yields tracked U.S. Treasuries and were two basis points lower in early trade.

Germany’s 10-year bond yield was at -0.692%, while 10-year Treasuries were down by the same amount at 1.56%,.

Germany’s 30-year bond yield was also well bid, and was last down three basis points at -0.20%. A lacklustre auction on Wednesday saw 30-year debt sold at a record low yield of -0.11%, but it raised only 824 million euros of bonds maturing in 2050 versus a target of 2 billion euros.

Flash PMI data for France, Germany and the euro zone will be watched for any further indication as to the state of the European economy. But money markets are still fully pricing in a 10 basis point rate cut by the European Central Bank, keeping downward pressure on bond yields.

Meanwhile Italian 10-year bond yields hit new October 2016 lows and were last down 4 bps to 1.297%, while its spread over Italy fell below 200 bps.

Italy may be closer to reaching a deal on a new government, after Prime Minister Giuseppe Conte resigned on Tuesday.

Reporting by Virginia Furness; Editing by Raissa Kasolowsky