Friday's European CPI number is turning into a global bond event.
After upside surprises in France, Spain and Germany, a high number is assured and that's leading to a rethink on how high Lagarde & Co need to go. For the March meeting, they've telegraphed 50 bps, even though the market still pricing in a 28% chance of a 75 bps surprise. A 50 bps move would get them to 3.00% and beyond that they've been hawkish. Plenty of market watchers see a 4% terminal rate but there are growing upside risks. Warm weather has been a godsend for energy prices but not every winter will be warm and that could just push the pain to this time next year. Though the ECB has no control over the weather, the optics of a double-rip of inflation would be a strain on credibility.
The European bond market has settled down today but Treasuries are playing catch-up, particularly after another strong initial jobless claims report and a jump in unit labor costs. US 10-year yields are up 8 bps to 4.08%, which is the highest since Nov 10.
"In the runup to the data, the Treasury market was under pressure with the belly of the curve leading the downtrade. Since the release, we've seen an extension of the price action. 10-year yields reached as high as 4.079% en route to what we expect will be a retest of 4.10% in the near-term," writes Ian Lyngen from BMO fixed income after the data.
The front end could also be ready to make headlines with US 2-year yields up 4.2 bps to 4.93%. A touch of 5% could bring retail investors out of the woodwork and would be a powerful alternative to risk assets in an uncertain world.
With the further rise in yields, the dollar found some bids and hit sessions highs against the yen, euro and pound.
