Hawks Take Flight: Global Bond Yields Spike On Hawkish Chatter, The US Dollar Closes In On 52-Week Highs Lunaro Weekly Report

(MENAFN- Mid-East Info) Nick Spencer-Skeen, Senior Executive Officer, Lunaro Markets Limited

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Friday Closing Prices

S&P 500 7,743 (+0.51%)

Nasdaq 27,069 (+0.48%)

Gold $4,285 (+0.26%)

Brent Crude Oil $104.32 (-2.43%)

Hawkish central-bank rhetoric dominated markets last week, pushing global bond yields higher and reinforcing expectations that restrictive policy may need to remain in place for longer.

In the US, several Federal Reserve (Fed) officials argued that persistent inflation and supply-driven price pressures could justify further interest rate hikes. Similar signals emerged elsewhere, with Bank of England officials increasingly open to another hike, while European Central Bank (ECB) policymakers refused to rule out additional tightening if elevated energy costs persist. The Bank of Canada also continued to emphasise the need to respond if inflation pressures broadened or persisted.

The resulting repricing weighed heavily on sovereign bonds, with yields rising across major developed markets as investors pushed up expectations for terminal rates and reduced the scope for near-term easing. This arguably created a more challenging backdrop for equities, particularly rate-sensitive sectors, while supporting the US dollar against several major currencies.

In our view, geopolitics remained the other major cross-asset driver. The Trump-Xi summit offered some prospect of improved US-China relations, although uncertainty around trade and Taiwan remained. Meanwhile, continued disagreement over reopening the Strait of Hormuz kept geopolitical risk premia embedded in oil markets. In FX, Japanese concerns over yen weakness intensified, but intervention rhetoric failed to prevent USD/JPY from materially moving lower, closing the week above 157.006.

Central Banks, Centre Stage

Central-bank communication is likely to remain a key focus this week, with traders likely to be looking for confirmation that the recent hawkish shift is being cemented. In the US, Fed Governor Barr speaks on the economic outlook on Tuesday, while Fed Vice Chair Jefferson discusses the economy and monetary policy on Thursday. This comes alongside appearances from Fed Governors Waller and Bowman.

Markets may be particularly sensitive to any signs of officials becoming comfortable with further tightening following last week's coordinated pushback against persistent inflation.

In Europe, ECB President Lagarde speaks twice early in the week, while the Bank of England calendar is unusually busy. Deputy Governor Ramsden discusses quantitative tightening, with MPC members Mann and Taylor also speaking on Tuesday, before BoE Governor Bailey appears on Thursday.

In our view, bonds may again be the main asset to watch as the reaction function. More hawkish chatter could keep yields elevated and potentially support the US dollar, while placing renewed pressure on rate-sensitive equities.

Key US Data Due

US data is also likely to be in focus this week, with August Personal Consumption Expenditures (PCE) inflation on Wednesday followed by September payrolls on Friday. The PCE report may be particularly important after the Fed's recent hawkish shift, as it's their favoured inflation measure. Traders may look for evidence that underlying inflation pressures remain persistent enough to justify further tightening.

Attention then turns to Friday's nonfarm payrolls report, where the balance between employment growth, unemployment and wage pressures.

The headline NFP print is expected by consensus at +90k, with the unemployment rate due to hold steady at 4.1%. A strong jobs print combined with a drop in the unemployment rate could strengthen the case for additional hikes, as it would suggest labour market remains in a robust position. Conversely, a weaker report could arguably provide some relief to risk assets.

Greenback Close to 52-Week Highs

Beyond the bond market, the US dollar is another notable asset to have on close watch for the week ahead. The sharp rally in recent weeks put the index (DXY) close to the highest level in a year. A combination of higher Treasury yields, resilient US data, and a renewed hawkish shift from the Fed appears to have given it a relative-rate advantage.

Given the expectation of higher rates in the US, the appeal of holding dollars has been enhanced due to carry, with a trader able to earn a higher yield versus some other respective currencies. The move has been reinforced by weakness elsewhere. The British Pound has fallen toward three-month lows, the euro recently touched a two-month low, and the yen remains under pressure despite intervention rhetoric.

From here, in our view, the next leg likely depends on the US data we previewed above. If it can take out the previous yearly highs, momentum could act to see fast money jump on board as well, pushing the dollar higher still in the short term, although this outcome is by no means certain.

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