Global bond rally intensifies amid rate cut bets

Bonds rallied and equities paused as a fresh batch of soft inflation data boosted the likelihood of interest-rate cuts, but also underscored the risk of an economic downturn.

Germany’s 10-year yield dropped below 2% for the first time in nine months after a report showed producer prices fell more than expected in November. Meanwhile, British 10-year borrowing costs retreated as much as 11 basis points as slower-than-expected inflation boosted the case for Bank of England rate cuts next year. Treasury yields slid 5 basis points to 3.9%, down more than 40 basis points this month.

The UK data “adds to the mounting evidence that global inflation has begun to crumble on a broader basis,” said Christoph Rieger, head of rates research at Commerzbank. 

The data initially lifted regional stock markets, but gains on the Stoxx 600 index quickly evaporated. US equity futures also eased, with contracts on the Nasdaq 100 shedding 0.3%. London’s export-oriented FTSE 100 benchmark held its gain, however, as the pound tumbled 0.5%. 

Policy-easing bets have gathered momentum across the developed world since the US Federal Reserve’s recent dovish pivot. Economic data has backed that view, especially in the euro area, where analysts surveyed by Bloomberg forecast the first recession since the pandemic. Inflation has slowed to 2.4% in November, from a peak above 10% last year,

Money markets have moved to price almost a 50% chance of an euro-area rate cut by next March, while seeing an even higher probability of a Fed cut that month. 

Investors have paid little heed to policymakers’ efforts to push back against the exuberance. Instead, they have seized on comments made Tuesday by Richmond Fed President Thomas Barkin, who suggested the U.S. central bank would “respond appropriately” if recent progress on inflation continued. 

The S&P 500 had jumped to a new 23-month high on Tuesday while the Nasdaq 100 touched a record peak for the third session in a row. However, investors are now having to balance the rate cut optimism against the negative fallout from economic recession.  

“It’s hard to see such a fast and deep rate-cutting cycle as the market appears to assume, unless the base case is a deep recession,” said Daniele Antonucci, chief investment officer at Quintet Private Bank.

This week’s U.S. data readouts, including existing home sales figures on Wednesday, Thursday’s GDP print and Friday’s data on personal consumption expenditures — the Fed’s preferred measure of inflation — are likely to offer further guidance.

Investors are also starting to weigh risks stemming from potential shipping delays and freight cost increases, as companies divert cargoes away from the Red Sea to avoid militant attacks. This rerouting will mean higher shipping costs and longer delivery time, Bloomberg Economics wrote in a note.

Crude oil extended gains, with Brent futures holding near $80 a barrel. Shares in shipping companies such as Hapag Lloyd AG and AP Moller-Maersk A/S rallied. 

Key events this week: 

• US Conference Board consumer confidence, existing home sales, Wednesday
• Bank Indonesia rate decision, Thursday
• US GDP, initial jobless claims, Conf. Board leading index, Thursday
• Nike earnings, Thursday
• Japan inflation, Friday
• UK GDP, Friday
• US personal income and spending, new home sales, durable goods, University of Michigan consumer sentiment index, Friday

Some of the main moves in markets: 

Stocks

• The Stoxx Europe 600 was little changed as of 10 a.m. London time
• S&P 500 futures fell 0.2%
• Nasdaq 100 futures fell 0.3%
• Futures on the Dow Jones Industrial Average were little changed
• The MSCI Asia Pacific Index rose 0.5%
• The MSCI Emerging Markets Index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.1% to $1.0965
• The Japanese yen rose 0.3% to 143.42 per dollar
• The offshore yuan fell 0.3% to 7.1408 per dollar
• The British pound fell 0.4% to $1.2678

Cryptocurrencies

• Bitcoin rose 0.6% to $42,771.11
• Ether rose 1.3% to $2,213.56

Bonds

• The yield on 10-year Treasuries declined four basis points to 3.89%
• Germany’s 10-year yield declined three basis points to 1.99%
• Britain’s 10-year yield declined 10 basis points to 3.55%

Commodities

• Brent crude rose 0.7% to $79.82 a barrel
• Spot gold was little changed

This story was produced with the assistance of Bloomberg Automation.