Bond yields continue to head south

While bond yields continue to decline as the market prices in substantial central bank interest rate cuts over the next 12-15 months, the main currency pairs continue to trade in tight ranges. The euro and sterling are both little changed against the dollar, trading at around $1.1050 and $1.3090 respectively this morning, while EURGBP continues to hover just below £0.8450. UK GDP data for July released already were slightly weaker than expected but have had little impact on the pound, while CPI inflation data due in the US later today would probably have to differ a lot from the consensus forecast to have a substantial effect on markets.

Short-dated government bonds continue to lead a decline in yields with US 2-year yields falling by around 10bps yesterday and equivalent German and UK yields about 5bps lower.  Yields are trading significantly below central bank policy rates, reflecting market expectations that the latter will be lowered substantially over the next year and beyond.

Equity markets had a mixed session. European stocks shed around 0.7%, reversing a good portion of Monday’s gains, but the S&P 500 rose for a second consecutive day – adding about 0.5% – as gains for tech stocks offset weakness in banks.

The UK economy failed to grow again in July, with GDP flat for a second consecutive month, according to data released earlier this morning. The economy still expanded over the three months to July – GDP rose by 0.5% from the three months to April driven by services and construction – though it seems as if the pace of growth is now moderating after particularly strong outturns in both Q1 (0.7%) and Q2 (0.6%).

Today’s CPI data in the US are expected to show  another modest increase in consumer prices in August. Headline and core prices are both seen rising by 0.2% from July according to the consensus forecast, which would leave the annual rates of inflation at 2.5% (down from 2.9% in July) and 3.2% (unchanged from July) respectively.