Dollar edging higher
Bond markets sold off yesterday, led by US Treasuries, with yields rising notably amid still elevated oil prices, concerns about inflation, and a further hardening of central bank rate hike expectations. Higher relative US yields provided some modest support to the dollar. The euro dipped below $1.16 for a time against the US currency (from Monday’s close of just over $1.1650) and is hovering around this level this morning. Sterling has held up somewhat better against the dollar, remaining in and around the $1.34 level, and continues to claw back ground against the euro, currently trading at around £0.8660.
US government bond yields rose by around 6-8bps across the curve, with 30-year yields reaching their highest level since 2007, while UK and German yields were 3-5bps higher on the day. UK yields are a good bit lower at the start of play this morning though, following softer than expected inflation data for April released a short while ago. Equity markets struggled in the face of higher bond yields. US stocks underperformed, with the S&P 500 down around 0.7% at the close.
CPI inflation in the UK fell by more than expected last month coming in at 2.8%, versus the consensus forecast of 3% and down from 3.3% in March. A reduction in domestic energy bills, announced before the war in Iran commenced, and a decline in food price inflation contributed to the fall in headline inflation, while core inflation (which excludes energy and food prices) fell to 2.5% from 3.1%, driven by a sharp decline in services inflation (to 3.2% from 4.5%), which reflected a number of factors including lower airfares and package holiday costs. The fall in inflation in April is likely to be fleeting though, with the effects of the Iran war expected to push the headline rate up again in the coming months (albeit now from a lower starting point than expected).
Fed member Paulson says the current stance of monetary policy “is mildly restrictive and that restrictiveness is helping to keep inflation pressures in check while the labour market remains stable,” adding that “keeping rates steady allows us to assess how the economy is evolving and the risks to both price stability and the labour market.”
For the day ahead, it is very quiet on the economic data front with a final estimate of Euro area inflation in April the only release of note (the flash estimate showed headline inflation rose further to 3% last month), while the Fed publishes the minutes of last month’s monetary policy meeting.