Bond yields plunge

Last week saw the market price in earlier and deeper interest rates cuts by the ECB and Fed in 2024 following the latest Euro area and US inflation readings, with the Bank of England expected to lower rates later and by less than the other two central banks next year. Sterling was the beneficiary of the reassessment of the outlook for rates, strengthening against both the euro and the dollar, and kicks off this morning trading at 85.7p and $1.267 respectively. The euro ended well off last week’s highs of around $1.10 against the dollar and starts out this week at $1.086.

Government bond yields fell sharply over the week, with German and US 2-year yields declining by the best part of 40bps and 10-year yields by around 30bps. UK yields also fell, albeit lagging the move lower elsewhere, with 2-and 10-year yields down around 20bps and 15bps respectively. Stocks, meanwhile, chalked up further gains, with the S&P 500 in the US closing Friday at its high for 2023 to date.

Markets by and large ignored comments by Fed Chair, Jerome Powell, on Friday, who attempted to push back on rate cut expectations, saying it would be “premature to conclude with confidence that we have achieved a sufficiently restrictive (monetary policy) stance” to return inflation to its 2% target, let alone “speculate on when policy might ease.”

Manufacturing in the US remained weak in November according to Friday’s ISM report, with the headline index of activity again in contractionary territory (at 46.7) amid declining output and new orders. Partly on the back of this data, the Atlanta Fed has lowered its tracking estimate of GDP growth in Q4 to 1.2% (annualised rate), well down from the Q3 outturn of  5.2%.

The key economic release this week is the November employment report in the US on Friday. The consensus expects the economy to have added 180k jobs last month (after a gain of 150k in October), with the unemployment rate seen holding at 3.9% and annual wage growth (hourly earnings) moderating a touch to 4% (from 4.1%).

Other data due this week include services PMIs for November (final readings) in the main economies on Tuesday; the ISM services index and job openings in the US tomorrow also; and a second estimate of Q3 GDP in the Euro area on Thursday.