A significant move in global bond yields last week puts up into a key crossroads for markets. Will these moves continue or begin to retrace? The Congressional testimony of Fed Chair Janet Yellen in addition to tier one economic data for the US will be key for market expectations of the Fed tightening. We analyse the outlook of key moves in forex, equities and commodity markets.
Are we on the brink of a significant change in market outlook? Major central banks have recently changed tack, seemingly in unison, with a shift in rhetoric from the ECB, Bank of England and Bank of Canada. This move away from a stance of ultra-loose monetary policy has sent global bond yields sharply higher. In just two weeks the US 10 year Treasury yield has jumped from 2.12% to 2.38%, or 26 basis points, whilst perhaps more intriguingly the German 10yr Bund yield has broken up from its 2017 range of 0.15% to 0.50%, up 30bps. However, is this the beginning of a significant leg higher in global yields that accompanies this shift in rhetoric? Let’s not get too far ahead of ourselves. There is a kay factor in all of this. Inflation remains hard to come by. Globally wage growth remains subdued, reflected once more on Friday in the US payrolls report with average hourly earnings again underwhelming. Bond markets have been reluctant to follow the lead of the Fed previously amid concern that inflation is just not reacting higher. Central banks seem desperate to normalise monetary policy even though inflation has not shown any sustainable signs of pushing higher. Why? For one, they need the tools in their armoury to combat the next economic downturn. That is prudent but in the absence of inflation this could lead to some fight back in bond markets whilst equities could struggle. Also, how will central banks react if markets have a wobble?