Bond yields head higher

Sovereign bond markets held centre stage yesterday amid a broad-based rise in yields as markets pared back expectations for central bank easing this year. Currency markets were relatively calm in comparison with the main exchange rates little changed, leaving EURUSD and GBPUSD trading at $1.0920 and $1.268 respectively this morning and EURGBP at around £0.861.

Markets have become less convinced that the main central banks will begin easing policy as soon as March and have scaled back expected rate cuts this year to around 125-150bps. This in turn has contributed to higher bond yields, with US, German and UK 10-year yields all rising by about 10bps in  yesterday’s session.

European stocks recovered some of the ground lost following Wednesday’s sell-off, closing around 0.6% higher, but the S&P 500 in the US again ended marginally lower on the day.

The annual rate of inflation in Germany jumped to 3.8% in December according to the flash estimate, up from 2.3% in November, largely reflecting negative energy price-related base effects. This will contribute to an increase in Euro area inflation, data for which are due out later this morning – the consensus expects headline inflation to have risen to 2.9% last month from 2.4% in November, but the core rate is seen nudging down to 3.4% from 3.6%.

There will be plenty of focus on today’s December employment (payrolls) report in the US. The economy is expected to have added 175k jobs last month, after a gain of 199k in November, with the unemployment rate edging up to 3.8% and annual earnings growth easing further to under 4%.

Other US data due today include the ISM services and factory orders, while the construction PMI is scheduled in the UK.