European stocks rise, bond yields decline

All focus was on the European Central Bank, which is considered almost certain to cut rates by a quarter point to 3.75% on Thursday, which would make it the first major central bank to reduce rates this cycle

European stocks bounced and government bond yields declined on Monday as investors looked forward to an interest rate cut from the ECB, while U.S. jobs data kept the focus squarely on inflation.

The pan-European STOXX index was 0.6% higher by 0850 GMT, while U.S. stock futures also gained.

In bond markets, the U.S. 10-year Treasury yield was 4 bps lower to 4.47% and German yields, which hit six-month highs last week, also declined.

All focus was on the European Central Bank, which is considered almost certain to cut rates by a quarter point to 3.75% on Thursday, which would make it the first major central bank to reduce rates this cycle.

However a surprisingly high reading for euro zone inflation, out last week, further weakened the case for a rapid round of cuts. Markets now price in fewer than 60 bps of easing now - meaning two 25-basis point cuts and less than a 50% probability of a third.

There is a relatively positive risk tone to start the week, which seems like a continuation of the positive momentum seen on Friday, albeit is somewhat surprising given the bumper calendar of event risk coming up, according to Michael Brown, strategist at broker Pepperstone in London.

China's factory activity grew at the fastest pace in about two years in May, data showed on Monday. That extended the optimism prevailing in markets following Friday figures showing the U.S. Fed's preferred measure of inflation held steady in April.

The ECB decision is perhaps the most important event to watch, especially after last week’s inflation data which raises the hawkish risk that there is only one more cut this year after a 25-bp cut on Thursday, Brown said.

Markets also imply almost an 80% probability the Bank of Canada will cut at its meeting on Wednesday and around 60 bps of easing this year, though analysts are hopeful the easing will be even deeper.

In Europe, focus was also on a downgrade to France's credit rating by Standard & Poor's, but the country's bonds showed little reaction.