Core bond yields rallied heading into the weekend. They even managed to post a net weekly gain. Friday’s move higher was inspired by central bankers, not least the Fed‘s Powell and the ECB‘s Lagarde, leaning against the dovish market pivot. Another unexpected rise in consumer inflation expectations also weighed on the front end of the US curve.
The one-year ahead gauge rose to 4.4% from 4.2%, while the long-term indicator (5-10 yrs at 3.2%) has never been higher in the past 26 years except for two months in 2008 (3.4%). Yields in the country rose by 4.2-5.1 bps at the front end and by as much as 2.7 bps at longer maturities. The 10-year yield moved further north of the 4.5% support level. German yields gained between 4.6-7.8 bps with some underperformance in the belly. Wall Street extended opening gains to 1.15-2.05% with bullish breaks in all three major indices. Risk-on supported oil (Brent bounced off $80/b support) and the euro.
EUR/USD strengthened from 1.067 towards 1.07, but remained below that level. Poor UK GDP data caused EUR/GBP to test the October high, but sterling prevented a break lower. The pair closed above the 50% EUR/GBP recovery from the 2023 decline at 0.8735. EUR/JPY hit a new 15-year high just shy of 162. USD/JPY was still an inch away from its previous YtD high (151.72), but is powering through this morning. At 151.79 it is approaching the 2022 intraday high of 151.95. If it is broken, it will be a technical graveyard for the JPY with the next support not coming until around 160. Asian news flow is thin, but Moody’s downgrade of the US outlook to negative from stable (with the AAA rating unchanged) is getting some attention.
Moody’s said that risks to fiscal strength have increased and may no longer be offset by the country’s credit strength. Budget deficits are expected to remain very large, while continued political polarization in Congress raises the risk that governments won‘t be able to reach consensus on plans to slow the decline in debt affordability. Without significant action, Moody’s expects the U.S. government to run large budget deficits of about 6% of GDP in the near term and about 8% by 2033, driven by higher interest payments and age-related spending. Deficits will average about 3.5% over the 2015-2019 period. They will increase the debt burden from 96% of GDP in 2022 to around 120% of GDP by 2033.
The new week starts very quietly, paving the way for some technically inspired trading without a clear direction. A few central bank speeches are worth following, but pale into insignificance compared to the avalanche that is due all week. Economic data includes US CPI tomorrow and Retail Sales on Wednesday. The UK continues last week’s economic update with the labor market report tomorrow, inflation numbers on Wednesday and retail sales to end the week. We maintain our expectations for a topside break in the EUR/GBP.