US bond yields soar
Expectations for Fed rate hikes have firmed considerably over the past few days. The market is now pricing in between three and four quarter-point hikes by September next year, up from around two at the close of play last Friday. This repricing of rate expectations has resulted in a very sharp rise in US bond yields right across the curve, while higher yields have contributed to a strengthening of the dollar. The latter has gained further ground against the euro and sterling, trading at about $1.1065 and $1.3240 respectively this morning. EURGBP remains tightly range-bound, hovering just above £0.8350. Producer price inflation data for October are due in the US later today. The risk here is that a stronger than expected outturn sends the dollar higher still.
US 2-and 10-year bond yields rose by 13-14bps yesterday, bringing the cumulative increase since the end of last week to around 35bps and 25bps respectively, very sharp moves by any standard. Equivalent German yields edged up by 2-3bps, and are around 15bps and 10bps higher on the week respectively, while UK yields rose by 6-8bps and are up 15-25bps on the week. In equity markets, US indices ended marginally lower, while European stocks closed broadly flat. Asian equities were mixed overnight, while the futures market points to a soft opening for Europe and the US today.
Fed member Williams says ” inflation is way too high and it continues to be high even on the latest (CPI) data”, adding that the central bank will “need to take actions over time that will ensure that we get inflation back to our 2% goal in a timely manner and on a sustained basis.” The market is more than pricing in a 25bps rate hike at next month’s monetary policy meeting.
ECB’s Vujcic says “the direction of travel (for interest rates) remains unchanged,” noting that indirect and second-round effects from the energy price shock on inflation may still show up with a lag. The market has almost fully priced in a 25bps hike in the ECB’s deposit rate at next month’s meeting.
For the day ahead, as mentioned, producer price inflation data for October are due in the US, while a second estimate of GDP growth in Q3, and a first estimate of employment growth in the same quarter, are due in the Euro area. There are a number of ECB and Fed members scheduled to speak over the course of the day.