June 21, 2019 / 8:36 AM / 6 months ago

UPDATE 3-PMI data pushes up euro zone bond yields, but rate cut bets still on

* Euro zone business activity picks up, but still weak

* Markets braced for rate cuts globally

* Euro zone bond yields set for sharp weekly declines

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates pricing, adds detail on Italy)

By Dhara Ranasinghe

LONDON, June 21 (Reuters) - Government bond yields across the euro area edged up on Friday after news that business activity in the bloc had picked up in June, but the data was not strong enough to shift market expectations that a rate cut is likely soon.

Borrowing costs remained within sight of record or multi-year lows hit on Tuesday after European Central Bank chief Mario Draghi’s warning shot that more easing was on the cards unless inflation picks up.

And yields across the bloc were set to end Friday with sizeable falls — Spanish 10-year yields were set for a ninth straight week of declines, the longest streak of weekly falls in almost 25 years.

IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI), which is considered a good guide to economic health, only nudged up to 52.1 this month from a final May reading of 51.8.

French business activity strengthened more than expected in June to the fastest pace in seven months and activity in Germany’s services and manufacturing sector edged higher in June.

But the overall tone of the euro zone PMI data remained weak and reinforced expectations for further monetary easing soon.

“We can take satisfaction from the fact that the PMIs haven’t deteriorated significantly,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

“But we need to see a meaningful improvement in the data to see the ECB sitting on its hands in the autumn. At the moment, expect a September rate cut.”

Euro zone money markets have almost fully priced in a 10-basis-point rate cut at the ECB’s September meeting.

Most 10-year bond yields in the bloc rose four to five basis points on the day on Friday.

Germany’s benchmark Bund yield was up four bps at minus 0.28%, not far off a record low of around minus 0.33% hit on Tuesday after Draghi’s speech in Sintra, Portugal. It is down two bps on the week.

Spanish 10-year bond yields were down six bps this week, declining for the ninth straight week.

Italy’s 10-year bond yield, flat on the day at 2.16% , was down 16 bps this week, its third straight week of declines, despite re-escalating tensions between Deputy Prime Minister Matteo Salvini and the European Union over Italy’s budget.

Salvini threatened to resign and bring down the government unless he can push through at least 10 billion euros ($11 billion) of tax cuts.

In addition to Draghi’s dovish shock on Tuesday, the U.S. Federal Reserve on Wednesday signalled rate cuts as early as July, saying it was ready to battle growing economic risks.

The Bank of Japan and other major central banks are also under pressure to deliver more stimulus soon, a backdrop that suggests bond yields remained anchored.

“If this week has shown anything, it’s that we’re once again very reliant on central banks for returns,” said Craig Erlam, senior market analyst at OANDA.

Reporting by Dhara Ranasinghe, Editing by Larry King and Gareth Jones

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