Sovereign Bond Yields Climb On Hawkish Fed Minutes


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Sovereign Bond Yields Climb On Hawkish Fed Minutes

Sovereign bond yields rallied strongly last week after the release of the minutes from December’s Federal Reserve meeting revealed that policymakers are considering a faster pace of rate hikes [1]. The first 25 basis point increase could come as early as March with Fed officials also discussing plans to reduce the Central Bank’s bloated balance sheet which has ballooned even further as a result of the pandemic. Following the meeting last month, Fed Chairman Jerome Powell did acknowledge that the risk of higher inflation becoming “entrenched” had increased.

The 10-year US Treasury yield spiked by 27bps to 1.77% as traders reassessed the near term path for interest rates. Friday’s US Labour Market Report which revealed that unemployment declined to 3.9% during December also provided a kicker for yields despite the number of new jobs last month missing expectations [2]. Yields also rose across the curve in the UK where the 10-year gilt yield closed the week at 1.18% after a jump of 21bps. Meanwhile on the Continent, the equivalent duration benchmark yield rose by 10bps to -0.11%.

Moving to global equity markets, performance was varied. In the US, the S&P500 retreated by -1.9% despite hitting another record level earlier in the week; technology and health care stocks were noticeably weak [3]. In the UK, the large cap FTSE100 increased by +1.4% whilst the mid-cap centric FTSE250 fell by -0.5%. As for Europe, both the German DAX and French CAC40 concluded the week in positive territory having risen by +0.4% and +0.9% respectively. The Japanese Nikkei 225 fell by -1.1% after the government placed three prefectures in a state of quasi-emergency following a spike in coronavirus cases. [4]

Oil prices moved another leg higher with brent crude jumping by +4.4% to $81.88 a barrel thanks in part to supply concerns in Kazakhstan and Libya [5]. Elsewhere, gold retreated by -1.7% to $1,792 an ounce as a result of some modest strength in the US Dollar. Copper prices also fell last week with the metal declining by half a point to $9,692 a tonne.

Week Ahead

It’s a relatively busy week for UK macro data releases, kicked off on Tuesday by the British Retail Consortium which publishes its monthly retail sales monitor. Monthly GDP data for November and industrial production figures are also due later in the week. Retail sales are also due in the US this week although Wednesday’s CPI inflation figure is by far the standout figure released in the country this time around. Other figures to keep an eye on include industrial production, the University of Michigan’s Consumer Sentiment indicator and the Fed’s bimonthly Beige Book which includes a raft of economic data from the central bank’s various districts.

In the Eurozone, unemployment data has already been published with the jobless rate declining by 10bps to 7.2%. Industrial production and monthly trade figures are released on Wednesday and Friday respectively. Inflation, both consumer and producer are the key numbers due from China this week with both figures expected to have fallen during December. There are no major numbers expected from Japan on this occasion. [5]

[1] Federal Open Market Committee, 15/12/2021

[2] U.S. Bureau Of Labor Statistics, 10/01/2022

[3] T. Rowe Price, 10/01/2022

[4] Refinitiv, 10/01/2022

[4] Oil Price, 10/01/2022

[5] Forex Factory 10/01/2022


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