Bond yields head south

It was an uneventful enough end to what was otherwise an eventful enough week in FX markets. The euro and sterling traded in narrow ranges against the dollar through most of Friday albeit still finishing about 1.5 cents and 2 cents off Thursday’s post-Fed meeting highs respectively and lower on the week overall. They are trading at around $1.08 and $1.26 as a new week kicks off, leaving the euro-sterling cross hovering just below 86p. Meanwhile the Japanese government has warned about the recent weakening of the yen, saying it “will take appropriate action against excessive fluctuations.”

With the latest round of the main central bank meetings completed, the biggest change in interest rate expectations has occurred in the UK as the market is now pricing in a greater chance of an earlier cut (June) and more in the way of policy easing this year (about 80bps in total) from the Bank of England. This was reflected in a sizeable decline in UK yields last week with both 2-and 10-year yields ending around 20bps lower, while equivalent US and German yields fell by about 10-15bps.

European and US equities finished marginally lower on Friday but they chalked up gains of around 1% and 2% respectively over the week as a whole, with the S&P 500 in the US hitting a new all-time high on Thursday.

ECB member (and head of the German Bundesbank) Nagel says “our concerns about inflation have diminished considerably,” adding “the probability that we will lower interest rates before the summer break has recently increased.” The market is currently almost fully priced for a quarter-point cut in June.

In contrast, Fed member Bostic says he is less confident about the trajectory for US inflation now than he was a couple of months ago and is pencilling in just one quarter-point cut in interest rates this year (from two previously). The updated interest rate “dot plot” published following last week’s Fed meeting showed the median expectation amongst the nineteen members was for three 25bps cuts in 2024.

It is a relatively quiet week for economic data with the main release the latest PCE inflation readings in the US on Friday. The consensus expects headline inflation to have nudged up to 2.5% in February from 2.4% in January, while core inflation is seen remaining at 2.8% last month. There are a number of central bank members, mainly from the Fed, scheduled to speak over the course of the week.