Some respite for bond markets
There was some respite for bond markets yesterday, with US Treasuries leading a decline in yields as the market priced back in some (small) chance of a Fed rate cut this year. The dollar generally remained on the front foot though, notwithstanding lower US yields, gaining ground against the euro and sterling. EURUSD is trading at around $1.1465 this morning, not far off its 2026 to date low of just over $1.14, while GBPUSD has fallen to a new low for the year at just under $1.32. EURGBP continues to edge higher and is currently trading at about £0.8690, which is around the middle of the extremely tight range of circa £0.86 to £0.88 that has prevailed over the opening three months of this year.
US 2- and 10-year yields both fell by around 8bps, the former following a decline of almost 10bps on Friday, while equivalent German and UK yields followed some of the way lower, falling by 5-6bps and 3-4bps respectively. Yields generally are heading further south at the open this morning. European equities had a positive session, adding around 1%, but US stocks gave up earlier gains to close down on the day overall (the S&P 500 shedding around half a percent).
Fed Chair Powell says “we don’t know yet what the economic effects (of the conflict in the Middle East) will be,” but notes that “our (monetary) policy is in a good place for us to wait and see” how the economy evolves. The market has priced out the prospect of any Fed rate hike this year and, indeed, now sees some small chance of a cut before year-end.
Ahead of today’s data for the Euro area as a whole, inflation in Germany accelerated to 2.8% in March according to yesterday’s flash estimate, up from 2% in February. Not surprisingly, this was due to a surge in energy prices, which rose by almost 8% on the month. Similarly, inflation in France rose to 1.9% this month (from 1.1% in February) according to data released a short while ago.
Euro area headline inflation is expected to have picked up to 2.6% in March, from 1.9% in February, according to the consensus forecast, while core inflation (which excludes energy and food prices) is expected to be unchanged at 2.4%. Other data due today include consumer confidence (for March) and job openings (for February) in the US. There are a number of Fed/ECB members scheduled to speak over the course of the day also.