April 20, 2018, by Lorcan Roche Kelly
Inflation worries are stalking global bond markets this week as commodity prices push higher on a combination of U.S. sanctions, trade dust-ups, and continuing tight oil supplies. With the 10-year Treasury yield close to its 2018 high, investors once again have the 3 percent mark in focus. The breakeven rate signaled by 10-year inflation-linked Treasuries rose to 2.19 percent yesterday, the highest since 2014. In the market this morning, the 10-year Treasury yield was relatively unchanged at 2.916 percent, with the two-year yield at 2.437 percent.
Oil ministers from OPEC and Russia meeting in Jeddah, Saudi Arabia are finding new reasons to continue with their production cuts, in spite of their success in wiping out 97 percent of the targeted inventory surplus. Saudi Energy Minister Khalid Al-Falih pointed to the need to restore investment in oil and gas production, a sentiment echoed by his Russian counterpart Alexander Novak. Analysts now see the nations as being willing to over-tighten the market, even as crude reaches three-year highs. A barrel of West Texas Intermediate for May delivery was trading at $68.33 by 5:40 a.m. Eastern Time, with Brent crude at $73.84.
Carney the dove
Bank of England Governor Mark Carney rattled the pound after he unexpectedly damped expectations for a May rate rise during an interview with the BBC. He said policy makers would make their decision “conscious that there are other meetings” at which they could act this year. Sterling dropped 0.8 percent after his comments yesterday, and was down a further 0.2 percent this morning to $1.4055 by 5:40 a.m., despite arguments this morning from MPC member Michael Saunders to hike rates sooner rather than later. Market odds of a rate increase in May have dropped to below 50 percent, from more than 80 percent earlier in the week.
Overnight, the MSCI Asia Pacific Index dropped 0.8 percent, while Japan’s Topix index closed 0.1 percent higher as rising yields boosted insurers in the country. In Europe, the Stoxx 600 Index was broadly unchanged amid a mixed bag of earnings, with Ericsson AB the stand-out performer. S&P 500 futures pointed to a slight loss at the open, and gold was also slipping.
While there’s very little in the way of economic releases scheduled for today, oil investors will watch the Baker Hughes rig count at 1:00 p.m. to see if higher crude prices help it maintain its recent strong run. It’s the turn of industry heavyweights to release earnings today, with General Electric Co. and Honeywell International Inc. both reporting. The world’s finance ministers and central bankers meet this weekend in Washington at the IMF, with trade tensions likely to dominate discussions.