(Bloomberg) — Bonds climbed, clawing back some of Monday’s slump in the buildup to US inflation figures that are crucial to the debate over when the Federal Reserve will start to cut interest rates.
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Treasury yields retraced some of the sharp gains that pushed rates on the 10-year note to the highest since November in the previous session. Government debt in the UK and Germany followed suit, with yields falling across the curve.
Stocks were muted, as US futures extended Monday’s flat close on Wall Street, when trading was the thinnest since Christmas. Europe’s Stoxx 600 Index edged lower.
Caution dominated sentiment before Wednesday’s inflation report, which is forecast to show some further easing of price pressures. Traders are also preparing for the European Central Bank’s rates announcement on Thursday, which could support bets on earlier easing by the ECB than the Fed, and for the start of the first-quarter earnings season.
While markets now favor just two US rate cuts this year, former Fed St. Louis President James Bullard said three reductions remain “the base case.” For Mohit Kumar, strategist and chief economist for Europe at Jefferies, the more important discussion should be over how the Fed would respond to any signs that resilience in the American economy is faltering.
“The right question is whether the Fed is willing to cut rates if there is any sign of weakness,” Kumar wrote in a note to clients. “And on that we are reasonably confident that if the economy weakens, we will see easing from the Fed which would support risk sentiment.”
The dollar was little changed, with the yen hovering near a 34-year low and around the closely watched 152 level that many say will trigger Japanese authorities to act.
Elsewhere, oil traded near a five-month high as investors weighed simmering tensions in the Middle East and persistent supply concerns. Israel said progress has been made in negotiations for a cease-fire in Gaza, signaling a potential easing of hostilities, but Hamas denied the claim.
While economists surveyed by Bloomberg expect the consumer price index will show some cooling in inflation, the core gauge, which excludes food and energy costs, is forecast to be up 3.7% from a year earlier — above the Fed’s 2% target.
Marija Veitmane, head of equity markets research at State Street Global, said her firm’s measure of online inflation pointed to a potentially above-consensus read. “We have seen prices in every sector we track to grow at higher than average pace in March,” she said.
As for corporate results, “we continue to worry about narrowness of earnings, where majority of growth comes from the tech/large-cap stocks, which majority of companies are showing signs of stress,” Veitmane said. “Falling margins are particular concerns as they tend to precede layoffs.”
In individual stock moves Tuesday, BP Plc rose to a five-month high after an update that analysts said showed a strong performance in oil and gas trading. Renault SA advanced after an upgrade from analysts at Barclays Plc. Mining stocks were a bright spot in Europe as iron ore headed for its biggest two-day rally in more than two years.
Elsewhere in commodities, gold held a record high, up more 17% since mid-February. Copper traded near a 15-month high as supply tightens and global manufacturing picks up.
Key events this week:
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China aggregate financing, money supply, new yuan loans, Tuesday
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Japan PPI, Wednesday
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Canada rate decision, Wednesday
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US CPI, Fed minutes, Wednesday
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Chicago Fed President Austan Goolsbee speaks, Wednesday
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China PPI, CPI, Thursday
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Eurozone ECB rate decision, Thursday
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US initial jobless claims, PPI, Thursday
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New York Fed President John Williams speaks, Thursday
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Boston Fed President Susan Collins speaks, Thursday
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China trade, Friday
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US University of Michigan consumer sentiment, Friday
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Citigroup, JPMorgan and Wells Fargo due to report results, Friday.
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San Francisco Fed President Mary Daly speaks, Friday
Some of the main moves in markets:
Stocks
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S&P 500 futures were little changed as of 6:36 a.m. New York time
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Nasdaq 100 futures were little changed
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Futures on the Dow Jones Industrial Average were little changed
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The Stoxx Europe 600 fell 0.3%
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The MSCI World index rose 0.1%
Currencies
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The Bloomberg Dollar Spot Index fell 0.1%
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The euro was little changed at $1.0869
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The British pound rose 0.2% to $1.2686
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The Japanese yen was little changed at 151.77 per dollar
Cryptocurrencies
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Bitcoin fell 1.7% to $70,470.96
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Ether fell 1.8% to $3,621.02
Bonds
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The yield on 10-year Treasuries declined three basis points to 4.39%
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Germany’s 10-year yield declined four basis points to 2.39%
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Britain’s 10-year yield declined five basis points to 4.04%
Commodities
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West Texas Intermediate crude rose 0.2% to $86.57 a barrel
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Spot gold rose 0.8% to $2,358.06 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Winnie Hsu, Colleen Goko, Sujata Rao and Chiranjivi Chakraborty.
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