Bond yields surge

A move in oil prices back above $100 per barrel and much stronger than expected Purchasing Managers’ survey data in the US – suggesting the economy is expanding at its fastest pace in over 5 years – resulted in a pronounced hardening of central bank rate hike expectations and a surge in government bond yields. The US led the rise in yields, contributing to some further strengthening of the dollar. The euro and sterling are trading at around $1.1390 and $1.3250 respectively this morning, closing in on their year-to-date lows of $1.1325 and $1.3150 respectively. EURGBP is a touch firmer at the start of play, trading at around £0.86. There will be some market focus on today’s Trump-Xi summit in Washington, with the US Treasury Secretary already announcing a 2-month extension of the ‘trade truce’ (remember the trade truce?!)

The firming of rate hike expectations – which sees the market now pricing in almost 100bps of hikes by the Fed and ECB, and more than 100bps of hikes by the Bank of England, over the next twelve months or so – resulted in a surge in government bond yields. US 2-year and 10-year yields both rose by around 16bps, while equivalent German and UK yields increased by 10-12bps. Higher yields weighed on equity markets to some extent with US and European stocks off around 0.5% to 0.75% on the day.

The latest Purchasing Managers’ survey data – PMIs – in the US were considerably stronger than expected. The headline PMI rose to 58.7 in September, pointing to the fastest pace of business activity in over five years. Moreover, “employment…rose sharply, with jobs added at a pace not seen for over four years (while) input costs surged on the back of the recent spike in energy prices, adding to a worsening inflation picture”. The equivalent survey data for the Euro area “signalled strengthening growth in the eurozone private sector during September” (the headline index rose to 53.1), alongside rising input cost and output price inflation, while for the UK, the PMIs pointed to continued growth in business activity in September, albeit at a slower pace than in August (the headline PMI fell to 51.7), with price pressures accelerating on the month.

Fed Governor Barr says “economic growth is strong and the labour market is solid (but) risks to achieving our (2%) inflation target have increased.” He adds that, in his base case, “further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion.”

For the day ahead, economic data due include weekly jobless claims, new home sales (August) and the Q2 current account in the US, while the CBI publishes its latest retail sales survey in the UK. There are a number of Fed, ECB and BoE members scheduled to speak over the course of today.