Bond yields head further north

A renewed rise in energy prices – oil rose to a new high for the week of over $86 p/b at one stage – contributed to a further re-pricing of central bank rate expectations, higher bond yields and a decline in equity markets.  The dollar didn’t do a whole lot though, ending largely flat on the day overall. EURUSD and GDPUSD are trading at around $1.1610 and $1.3360 this morning, marginally firmer than yesterday morning’s levels, with EURGBP little changed at just under £0.87. While the focus for markets is clearly on the Middle East conflict, today’s jobs report (for February) in the US will attract plenty of attention. A stronger than expected report, at a time of increased concerns about the inflation outlook, might see the dollar extend its recent gains. A weaker than forecast report might not dent the dollar too much though, given the current environment.

Amid the rise in energy prices, the market priced out about 5bps and 10bps of Fed and Bank of England rate cuts for this year respectively, and priced in an additional 8bps or so of a hike from the ECB (leaving the chances of a 25bps increase by year-end at around 65%). This passed through to government bond yields. US 2-year yields increased by around 4bps and German and UK yields both rose by about 10bps, while long-dated yields were higher as well. Meanwhile, equity markets gave up Wednesday’s gains with the Stoxx Europe 600 shedding almost 1.5% and the S&P 500 down a bit more than half a percent.

Fed Governor Bowman, who has supported lowering interest rates to address downside risks to employment, notes that, since the central bank’s January monetary policy meeting, “we’ve started to see some more information that is pointing to signs of stabilizing in the labour market,” adding that she expects “to see a little more (job) hiring” in the period ahead.

Today’s jobs report in the US is expected to show the economy added about 55k jobs in February, according to the consensus forecast, down from +130k in January, while the unemployment rate is seen unchanged at 4.3%. Retail sales for February are also due in the US, while Euro area data include a 3rd estimate of GDP in Q4 2025 and a second estimate of employment growth in the same quarter.