Bond yields head further north

Market interest rate expectations continue to adjust in response to central bank “guidance” and firmer than forecast economic data, with the timing of the first cuts in policy rates pushed out and the scale of easing in 2024 pared back. The dollar has been a modest beneficiary of this adjustment, although its gains have stalled with the currency trading back at around $1.09 and $1.27 against the euro and sterling respectively this morning. EUR/GBP is little changed at £0.858.

The change in rate expectations has contributed to an increase in government bond yields. UK bonds led the way yesterday, with 2- and 10-year yields both increasing by around 20bps. German and US 2-year yields rose by 10-15bps, while 10-year yields were 5-10bps higher on the day.

The latest economic data is the US were something of a mixed bag. Retail sales rose by more than expected in December, while manufacturing output posted a small increase last month but the  November outturn was revised down. The latest Atlanta Fed GDP tracker points to quarterly growth of around 0.5% in the final quarter of last year, down from 1.2% in Q3.

The outlook for the UK housing market continues to improve gradually according to the RICS survey, with “sales expectations picking up for a second consecutive month” in December and “price declines continuing to moderate at the national level.”

Economic data due today include construction output in the Euro area and housing starts and jobless claims in the US. ECB President Christine Lagarde speaks at the World Economic Forum in Davos.