Bonds rally as rate hike expectations ease
A renewed outbreak of hostilities between the US and Iran over the weekend threatened to upset markets at the start of this week but (conveniently enough) the two sides agreed to cease attacks just before Asian markets opened overnight. The dollar chalked up further gains last week albeit it did come off the boil a little on Thursday-Friday. The euro shed around a cent against the US currency, closing out the week trading just shy of $1.14 (but off intra-week lows of around $1.1325), while sterling fared somewhat better, weakening by less than half a cent to finish at around $1.32 (and off lows of just under $1.3150). EURGBP fell to a fresh 2026 low of just over £0.86 on Wednesday before ending the week down around half a penny at £0.8625. Looking to the week ahead, the key economic data release will be the June employment (payrolls) report in the US on Thursday, though there will be plenty of focus too on Euro area flash inflation data, also for June, on Wednesday. They are expected to show headline inflation eased a little this month, which might also lead to some further easing of ECB rate hike expectations.
There was a notable easing of central bank rate hike expectations generally last week, in tandem with a sizeable decline on oil prices, with about 25bps now priced in for the ECB and Bank of England by year-end, both down more than 10bps on the week, and just over 30bps for the Fed, down almost 10bps. The easing of rate expectations contributed to a rally in bonds with 10-year yields in the main markets falling by 10-15bps on the week.
Euro area consumers near-term inflation expectations fell in May according to the ECB’s latest survey, with 1-year ahead expectations declining to 3.5% from a circa 2.5 year high of 4% in April. 3- and 5-year ahead expectations were unchanged at 2.9% and 2.4% respectively albeit both were still up on pre-war levels. Given the fall in oil prices through June, inflation expectations should have eased this month.
Looking to the day ahead, economic data due include money supply/credit growth (May) and the Economic Sentiment Indicator (June) in the Euro area and mortgage lending/approvals (May) in the UK. The ECB’s Forum on Central Banking kicks off in Sintra (Portugal) today too and runs through until Wednesday.