Bonds reverse course as yields fall

Yesterday’s price action in markets was the polar opposite of Tuesday’s. The dollar and bond yields fell as softer than expected US labour market data contributed to a firming of Fed rate cut expectations, while stocks reversed most of their previous day’s losses. In FX, the euro and sterling are trading at around $1.1660 and $1.3430 against the US currency respectively, still a good bit below Monday’s highs of about $1.1740 and $1.3550. The pound has also recovered some ground against the single currency to trade at around £0.8675  (from lows of over £0.87).

In government bond markets, US and German 10-and 30-year yields fell by 4-6bps, while equivalent UK yields fell by around 5bps and 9bps respectively, with the fall in UK 30-year yields more than reversing Tuesday’s increase. In equity markets, European stocks gained just over 0.5% on the day, while the S&P 500 and Nasdaq closed  around 0.5% and 1% higher respectively.

The latest market data in the US were softer than expected, with the number of job openings falling by almost 2.5% in July (from June) and the pace of hiring remaining subdued (although job losses remain low too). Separately, the Fed’s latest Beige Book reports “little or no change in economic activity” over the past six weeks, with “flat to declining consumer spending” and “little or no net change in employment levels”. The market is currently pricing in about an 80% chance of a Fed rate cut this month.

Bank of England Governor Andrew Bailey says that, while he believes the direction for UK interest rates is still downwards, there is “now considerably more doubt about exactly when and how quickly we can make those further steps” given increased risks to the inflation outlook. The market isn’t fully pricing in another 25bps cut in rates until March next year.

For the day ahead, economic data due includes the ISM services index, jobless claims, and ADP employment report in the US; retail sales in the Euro area; and the construction PMI in the UK.