Bonds decline as traders weigh fewer Fed rate cuts

This week's jobs data could confirm expectations that Fed rate cuts will be scaled back.

Global bonds dropped, tracking the previous day’s sell-off in Treasuries, as traders priced the possibility of fewer interest-rate cuts this year from the Federal Reserve.

German 10-year yields climbed as much as six basis points to 2.36%, while UK borrowing costs rose seven basis points. Treasury yields steadied, after falling across the curve Monday when data showed US manufacturing unexpectedly expanded for the first time since September 2022. The report led traders to price in less monetary-policy easing by the Fed, briefly setting the odds of a first move in June below 50%.

Traders also now reckon the Fed can deliver fewer than three rate cuts this year, a view that could be bolstered if data at the end of this week show the US economy continued to add jobs last month. Fed Chair Jerome Powell — who is set to speak Wednesday — said Friday that officials are awaiting more evidence prices are contained, adding that it wouldn’t be appropriate to lower rates until officials are sure inflation is in check.

“The pendulum of sentiment in US rates may be shifting toward the hawkish direction,” said Ian Lyngen and Vail Hartman at BMO Capital Markets. “There remains ample room for expectations to meaningfully shift as more data is revealed.”

In equity markets, European shares advanced 0.6% as trading resumed after the Easter break, with energy stocks lifted by oil’s advance to new five-month highs. US futures were flat after a slightly weaker Wall Street close on Monday, while among individual premarket movers, Tesla Inc. dropped as analysts cut their estimates for this quarter’s delivery of electric vehicles. Walgreens Boots Alliance Inc. slumped amid concerns over the drugstore chain’s earnings outlook.

The yen remained in focus as the Japanese currency slipped further toward the 152-per-dollar level that many traders believe could force authorities’ hand toward intervention.

In emerging markets, the Turkish lira added to its surge against the dollar after President Recep Tayyip Erdogan indicated his economic team will be allowed to stay the course with orthodox monetary policies, despite an unprecedented rout for the ruling party in local elections over the weekend.

The crypto rally lost momentum, as expectations of higher-for-longer Fed rates weighed on more speculative areas of the market. Bitcoin lost more than 4% to trade below $67,000, having shed about 10% from its mid-March peak.

In commodities, oil prices were boosted by heightened geopolitical risks in the Middle East and tighter supply from Mexico, with US crude futures hitting $85 a barrel in New York for the first time since October.

Key events this week:

Eurozone S&P Global Manufacturing PMI, Tuesday
US factory orders, light vehicle sales, JOLTS job openings, Tuesday
Fed’s John Williams, Loretta Mester, Mary Daly and Michelle Bowman speak, Tuesday
St. Louis Fed President Alberto Musalem takes office, Tuesday. He replaces James Bullard.
China Caixin services PMI, Wednesday
Eurozone CPI, unemployment, Wednesday
Japan services PMI, Wednesday
US ADP employment, ISM Services, Wednesday
Fed Chair Jerome Powell speaks, Wednesday
Fed’s Austan Goolsbee, Adriana Kugler and Michelle Bowman also speak, Wednesday
Eurozone S&P Global Services PMI, PPI, Thursday
US initial jobless claims, Challenger job cuts, Thursday
Fed’s Loretta Mester, Alberto Musalem, Thomas Barkin, Patrick Harker, Austan Goolsbee speak, Thursday
European Central Bank publishes account of March rate decision, Thursday
Eurozone retail sales, Friday
US unemployment, nonfarm payrolls, Friday
Fed’s Michelle Bowman, Thomas Barkin and Lorie Logan speak, Friday