Bond yields head further north

The euro is hovering just above its 2024 to date lows against the dollar this morning trading at around $1.0625. Sterling is a little stronger after slightly firmer than forecast UK inflation data for March released earlier, trading at about $1.2460 against the dollar and 85.3p vis-a-vis the single currency.

US government 2-year bond yields breached 5% for the first time since mid-November following comments from Fed Chair Powell before easing back albeit still ending higher on the day. 10-year yields also closed higher, by around 7bps at 4.67%, as did equivalent German and UK yields (+5bps). In equity markets, European stocks shed almost 1.5% while US indices ended flat to marginally lower.

Fed Chair Powell says “recent data have not given us greater confidence (that inflation is heading sustainably towards the 2% target) and instead indicate that is likely to take longer than expected to achieve that confidence,” adding that “it is appropriate to allow restrictive monetary policy further time to work” (the recent rise in bond yields is helping in this regard) while also noting that if inflation pressures persist, the Fed can keep interest rates steady for “as long as needed.”

ECB President Lagarde, in contrast, has said “if we don’t have a major shock in developments, we are heading towards a moment where we have to moderate the restrictive monetary policy that we have,” adding this is likely to happen “in reasonably short order” (i.e. almost certainly in June).

UK inflation data for March released earlier today were a touch firmer than expected, with the headline rate dipping to 3.2% from 3.4% and the core rate nudging down to 4.2% from 4.5%. Within core, goods inflation slowed further to 1.5% (from 1.9%) while services inflation was marginally lower but still elevated at 6% (from 6.1%). Headline inflation should fall a good bit in April (to around 2% or so) as lower household energy bills kick in.

It is reasonably quiet on the data front today. A final reading for March CPI inflation is due in the Euro area – the flash reading showed headline and core inflation at 2.4% and 2.9% respectively – while the Fed releases its latest Beige Book. There are a number of Fed, ECB and BoE members scheduled to speak today also.

Written by: