Bond yields higher again

Bond yields edged higher again yesterday, extending last week’s increase, amid rising oil prices (Brent crude is approaching $111 p/b this morning), while equity markets were under pressure for the most part. In FX, the euro and sterling both advanced against the dollar for a time, reaching intra-day highs of about $1.1755 and $1.3575 respectively, but couldn’t manage to hold their gains. They are trading at around $1.17 and $1.35 this morning, while EURGBP is a little softer at about £0.8655, still within the range of £0.86 to £0.88 that has prevailed so far this year. The Bank of Japan left interest rates unchanged overnight but a sizeable minority voted for a hike, with the yen a touch firmer against the dollar as a result.

Government bond yields rose further, increasing by about 3-7bps across the main markets. UK bonds continued to underperform, which saw 10-year yields knocking on the door of 5% again (their multi-year high reached late last month). In equity markets, European stocks shed almost half a percent, extending last week’s decline, while US indices had a mixed session, with the S&P 500 and Nasdaq chalking up small gains but the Dow Jones ending in the red for the day.

The Bank of Japan left interest rates unchanged (0.75%) at its monetary policy meeting overnight. However, three (of nine) members preferred an immediate 25bps increase in rates, citing upside risks to inflation. The Bank raised its forecasts for inflation and lowered its projections for economic growth, mainly on account of the fall-out from the conflict in the Middle East.

According to the ECB, the war in the Middle East “has significantly increased firms’ selling price and input cost expectations” but has not affected their wage expectations. Its latest survey of enterprises (SAFE) reports that selling prices are expected to rise by 3.5% on average over the next 12 months, up from 2.9% in the previous survey round, while non-labour input costs, including energy, are expected to increase by 5.8%, up from 3.6%. By contrast, wage expectations “moderated slightly” and are expected to increase by 2.8%, down from 3.1% in the previous quarter.

For the day ahead, the Fed begins its two-day monetary policy meeting later, while economic data due include the ADP weekly employment report and the Conference Board’s survey of consumer confidence for April in the US and the ECB’s survey of consumer inflation expectations for March in the Euro area.