US bond yields rise further
The dollar failed to benefit much from last week’s firmer than expected US inflation data – both consumer and producer prices rose by more than expected in January – notwithstanding the market paring back the scale of expected Fed rate cuts this year, ending little changed from the previous Friday’s close against the euro and sterling. It kicks off this week trading just below $1.08 and just above $1.26 respectively, with the single currency at around 85.5p against the pound.
US 10-year bond yields rose for a second week running, increasing by about 10bps to 4.30% (to bring the cumulative increase since the end of last year to almost 50bps), while equivalent German and UK yields ended only marginally higher. In equity markets, European stocks advanced for a third week in a row, adding around 1%, while the S&P 500 in the US fell back from Thursday’s all-time high to end slightly lower on the week overall.
Following the latest US economic data, the market now expects not much more than 75bps worth of cuts from the Fed this year (about 25bps less than was the case a week ago) with a first quarter-point reduction not fully priced until the July meeting. The scale of expected cuts from both the ECB and Bank of England has also been pared back, to around 100bps and less than 75bps respectively, with a first quarter-point move priced for June and August respectively.
Fed member Daly said on Friday that three 25bps rate cuts is a “reasonable baseline” expectation for this year. She cited two opposing risks the Fed needs to take into account in setting policy – slower progress in bringing down inflation, on the one hand, and a deterioration in the labour market, on the other – and said the Fed should “resist the temptation to act quickly when patience is needed and be prepared to respond agilely as the economy evolves.”
The Chief Economist of the Bank of England (Pill), in a speech in the US, noted that “even though we have weak (economic) activity – and in the UK we’re now in a technical recession – that of itself is not necessarily putting that much downward pressure on inflation,” adding that “getting to the point where we’re able to (cut interest rates) is still some way off” as it will take “several more months” to be convinced that inflation is returning sustainably to target.
Economic data of note this week include flash PMIs for the main economies on Thursday and the latest ECB consumer inflation expectations survey on Friday. The Fed (Wednesday) and ECB (Thursday) publish the minutes of last month’s monetary policy meetings, while there’s a sizeable enough number of central bank speakers scheduled over the course of the week.