Rising oil prices, higher bond yields
The relentless rise in oil prices – Brent crude is north of $120 p/b this morning – continues to drive government bond yields higher across the main markets. The Fed left interest rates unchanged, as expected, but three (of twelve) members voted against retaining an “easing bias” in the monetary policy statement, which added to the rise in US bond yields. Next up it’s the ECB and Bank of England (BoE), who announce policy decisions today. Though both are seen keeping rates on hold, market expectations for their respective policy rates over the coming month have become much more bearish in the past week as oil prices have surged. They are now expected to hike rates by circa 80bps by the end of this year, with a 25bps increase more than fully priced in for the ECB, and almost fully priced in for the BoE, for the meetings in June. Meanwhile, ahead of today’s rate announcements, the euro are sterling are trading at around $1.1670 and $1.3470 against the dollar respectively, having lost some ground yesterday, while EURGBP continues to hover just above £0.8650.
Government bond yields rose sharply again yesterday. The short-end of curves led the way once more with 2-year yields increasing by some 9-11bps across the main markets, while 10-year yields were 5-8bps higher on the day. Equities had another down day, though losses were relatively small. Indeed, the fall in stocks so far this week has been relatively modest considering the scale of the rise in oil prices that has occurred.
The Fed in its policy statement noted that economic activity has been expanding at a solid pace, unemployment has been little changed in recent months, and inflation “is elevated, in part reflecting the recent increase in global energy prices.” In his post-meeting press conference – his last as Fed Chair – Jerome Powell said that, beyond a near-term rise in inflation, the “scope and duration of potential effects on the economy” resulting from the conflict in the Middle East “remain unclear, as does the future course of the conflict itself.” He added that the central bank “will continue to monitor the risks” to inflation and employment, noting that it is “well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data (and) the evolving outlook.”
Headline HICP inflation in Germany nudged up to 2.9% in April, from 2.8% in March, according to the flash estimate, coming in a bit below the consensus forecast for a reading of 3.1%. Based on the national CPI measure, core inflation – i.e. excluding energy and food prices – dipped to 2.3% (from 2.5%) driven by a decline in services inflation (to 2.8% from 3.2%).
Looking to the day ahead, in addition to the ECB and BoE meetings, economic data due include a flash estimate of Euro area inflation in April – headline inflation is seen rising to around 3% from 2.6% in March according to the consensus forecast – and PCE inflation (the Fed’s target measure) for March in the US – expected to have risen to 3.5% from 2.8% in February – while preliminary estimates of first-quarter GDP growth are also due in both the Euro area and the US.