Further fall in US bond yields

Benign inflation data in the US contributed to a further fall in bonds yields on Friday, while there was some respite for US equity markets in particular after a tough week overall. The dollar advanced again at the end of the week, albeit its gains were very modest, while it is a touch softer this morning amid indications over the weekend that, while US tariffs on China, Mexico and Canada seem likely to go ahead tomorrow, those on the latter two may be lower than the 25% touted by Trump again last week. The ECB meets on Thursday, with another 25bps cut in the deposit rate almost certain, while Friday sees the release of the key jobs report in the US. Ahead of all of this, the euro is trading at around $1.04 and £0.8260 against the dollar and sterling at the off today, while the pound is hovering just below $1.26 against the dollar.

Fed rate cut expectations hardened noticeably over the course of last week, with about 60bps now priced in for this year, which in turn contributed to a sizeable fall of around 20bps in US bond yields. German and UK yields also fell on the week, by 5-10bps, amid a more modest firming of expectations for ECB and BoE rate cuts, with about 85bps and 60bps respectively priced in for the remainder of the year. In equity markets, the S&P 500 gained almost 2% on Friday, but was still down around 1% for the week, while European stocks ended slightly lower on the day and were marginally lower on the week.

Friday’s PCE inflation data in the US were in line with expectations. Both headline and core prices rose by 0.3% in January (from December), which resulted in a slight dip in the headline rate of inflation to 2.5% (from 2.6%) and a decline in core inflation to 2.6% (from 2.9%), its lowest level since the middle of last year.

Today’s flash CPI data for February in the Euro area are expected to show headline and core inflation fell to 2.3% and 2.5% respectively last month according to the consensus forecast, down from 2.5% and 2.7% in January. Other data due today include the ISM manufacturing index in the US and mortgage lending/approvals in the UK, while final readings for the February manufacturing PMIs are due in the main economies.