Bonds rally as oil prices fall
The continuing fall in oil prices – Brent crude is back down to pre-war levels at just under $73 per barrel – led to something of a delayed rally in bond markets with the US leading a notable decline in yields. Lower US yields helped stall the dollar’s advance (for now anyway) with EURUSD and GBPUSD trading at around $1.1350 and $1.3180 respectively this morning, little changed from yesterday morning’s levels and off their intra-day lows of circa $1.1325 and $1.3140. EURGBP is trading at about £0.8620, having dipped to a low of £0.86 during yesterday’s session. For today, in light of the Fed’s hawkish pivot at last week’s monetary policy meeting, there should be plenty of focus on today’s PCE inflation data for May in the US. They are expected to show the headline rate of inflation accelerated to over 4% last month, more than double the Fed’s 2% target. That said, the recent fall in oil prices has helped to ease market concerns about the outlook for inflation.
The US-led rally in bond markets was concentrated at the long-end of curves. Hence benchmark US 10-year yields fell by around 11bps while equivalent UK and German yields were about 6-7bps lower on the day. Short-dated yields did join in the rally too though with 2-year yields falling by 4-5bps. Equity markets had another down day with both European and US stocks ending lower, albeit losses were fairly modest.
ECB member Schnabel says “the (US-Iran) ceasefire is no reason for monetary policy to let its guard down.” She believes that “from today’s perspective, we will need to continue raising interest rates in order to bring inflation back to our target of 2% in the medium term,” while noting that the “extent and timing of further measures will depend on how the conflict, the economy, and inflation evolve.”
As mentioned, PCE inflation for May in the US is the main economic data release today. Other US data due include personal incomes & spending (May), durable goods orders (May), the regular weekly jobless claims report, and a third estimate of GDP growth in the first quarter of this year. There are a few Fed and ECB members due “on the wires” over the course of the day.