Bond yields fall post inflation data
Yesterday’s softer than expected inflation data in the US and the UK prompted a re-pricing of central bank rate cut expectations, most notably for the Bank of England (BoE), a large fall in bond yields, and a rally in equity markets. In the currency markets, the euro and sterling rose to highs for the day of about $1.0350 and $1.23 against the dollar following the US inflation numbers, but they have since come back to around $1.0290 and $1.22, leaving EURGBP trading at around £0.8435 this morning. UK GDP data for November released a short while ago were a touch weaker than expected, weighing on the pound a little, while retail sales due in the US later today could be a market-moving release.
The market is pricing in an additional 25bps reduction in UK interest rates this year on the back of the latest UK inflation numbers, with just over 50bps worth of cuts now expected for the year as a whole, and sees about a 90% chance of the BoE cutting by 25bps next month. Fed and ECB rate cut expectations both firmed by around 10bps, with about 37bps priced in for 2025 in the case of the former and about 95bps in the case of the latter. The next cut from the Fed has been brought forward to around September, while the market fully expects the ECB to lower rates by 25bps at the end of this month.
In government bond markets, UK 2-year yields fell by about 15bps yesterday while 10-year yields, which have risen sharply since the start of the year, fell by around 17bps. Equivalent US yields were 10bps and 15bps lower respectively, while German 2- and 10-year yields fell by 6bps and 10bps. In equity markets, the S&P 500 in the US rallied by almost 2% and the FTSE 250 in the UK gained about 3%, while European stocks added just over 1%.
Regarding the US inflation data, headline consumer prices rose by 0.4% in December, pushing the annual rate up to 2.9% from 2.7% in November, but core consumer prices (while excludes energy and food prices) rose by a smaller than expected 0.2% last month, pushing the annual inflation rate on this measure down to 3.2% (from 3.3%), the lowest reading since August.
The UK economy expanded by 0.1% in November according to this morning’s GDP data, having contracted by 0.1% in October, with increases in output in services and construction offsetting a decline in manufacturing. GDP over the three months to November was flat on the three months to August, suggesting the economy will see little or no growth in Q4 after stagnating in the third quarter.
Looking to the day ahead, as mentioned, retail sales are due in the US, along with weekly jobless claims, import prices, and the housing market index, while the trade balance is due in the Euro area. The ECB publishes the minutes of its December meeting today as well.