More of the same

It was another day of rising energy prices, rising bond yields and falling equity markets. Perhaps the best that can be said is that energy prices and bond yields both finished off their highs of the day while equity markets finished off their lows of the day. In FX, the euro and sterling fell further against the dollar relative to Monday’s closing levels, hitting new 2026 to date lows of circa $1.1530 and $1.3250 respectively in the process. They have since managed to claw back some ground however, trading at about $1.16 and $1.3350 this morning. EURGBP continues to drift lower. It is hovering just below the £0.87 level, down a bit more than half a penny from last Friday’s close.

While oil and European/UK gas prices ended off their highs, they still rose by almost 5% and circa 23% on the day respectively. They are also edging higher again this morning, leaving them up 15% and almost 80% on the week so far. Given concerns about the pass-through to consumer price inflation, central bank rate expectations continue to adjust. The market now sees just one 25bps cut from the Bank of England this year (not fully priced in until late in the year), down from two previously, and is  pricing in about a 30% chance of a 25bps ECB hike by end-2026, having been pricing in some chance of a rate cut up to last Friday. Regarding the Fed, the market sees slightly less than 50bps worth of cuts this year, down from a bit more than 60bps priced in at the end of last week.

Government bond yields backed up further albeit finishing off their highs. UK yields rose by around 10bps across the curve; German yields increased by 3-6bps (with the largest increase occurring at the short-end of the curve); while US yields were about 3bps higher on the day. In equity markets, European stocks again underperformed the US. The Euro Stoxx 600 shed a further 3%, while the S&P 500 was off around 1.5%. Asian markets were quite a good deal lower overnight, though European indices are marginally in the black at the start of play today.

Headline inflation in the Euro area came in slightly higher than expected in February at 1.9%, according to the flash reading, up from 1.7% in January. The increase was due mainly to higher core inflation, i.e. excluding energy and food prices, which rose to 2.4% from 2.2%, with both core goods and core services inflation picking up last month (to 0.7% and 3.4% respectively). The annual rate of decline in energy prices slowed a touch to -3.2% in February from -4.0% in January.

Looking to the day ahead, economic data due include final PMI services readings for February in the main economies; producer prices and unemployment (both for January) in the Euro area;  and the ISM Services index and ADP employment report (both for February) in the US. The Fed also publishes its latest Beige Book, ahead of its monetary policy meeting in a couple of weeks. There are also a number of ECB members due on the wires during the course of the day.