Traders supporting the markets with more buying pressure
The US bond yields have not reacted to the new spending news yet
Bank of England's policymaker Gertjan Vlieghe thinks that the UK's economy is ready for higher rates
UK’s CPI number has a special importance
After suffering from it’s worst week in nearly two years, traders over at Wall Street have decided that they are behind the recovery now. We have seen another stellar day for the US stock market yesterday as investors rushed to buy stocks at a better price. The message is same over in Europe, traders supporting the markets with more buying pressure and this is helping the European indices to recover from their recent heavy losses.
Overall, the European markets and US future are looking strong today with the help of a strong positive momentum and thanks to the stabilising sentiment among bond traders.
Remember the sell-off was triggered due to the qualm around higher inflation. The tax cuts which Trump administration brought in the sunlight has fuelled worries amid investors that inflation would be running hot. Ironically enough though we had no such concerns when this process started and now in a matter of weeks, inflation became the very reason for the sell-off which we experienced.
President Trump announced his massive infrastructure plans yesterday. You could argue that the Federal spending of $200 billion is not something which is going to fuel any further rout in the bond yields. But here is the fact, that the US is running a large number when it comes to the deficit and with more federal spending, it only means more bond issuance. The US bond yields have not reacted to the new spending news yet, but the odds of such an event to take place have certainly skewed to the upside in our opinion. The White House indicated over the weekend that the path of the US interest rate hike could steepen further if there is any need. This means that if the Fed sees that the market is thinking that the Fed needs to take action to tackle inflation, the bank would take all necessary steps to address that. The White House statement pushed the US 10 bond yield towards 2.9% but we are off from that level again. Perhaps, need another announcement.
Back in the UK, the Bank of England's policymaker Gertjan Vlieghe thinks that the UK's economy is ready for higher rates, not sure on what basis he thinks this or if he is looking through a different lens. Nonetheless, his comments have increased the importance of the upcoming data because any positive reading would mean that the odds are moving in Vlieghe's favour. Today's UK’s CPI number has a special importance. The expectations are; we would witness the CPI number losing some of it’s steam after touching its peak 3.1%. The forecast for the number is 2.9% while the previous reading was at 3.0%.
However, if the inflation number does start to tick higher again, it would increase the pressure on the BOE to tweak it’s monetary policy. This means another increase in the interest rate and that would not be a welcoming sign for the UK's economy. The BOE’s governor has indicated and has prepared the market to some extent that inflation could tick higher which is a big change in his earlier stance. The only safety net for the BoE could hope for is the bounciness in the wages and the wages should continue to show the same sort of resilience as they have over in the US.