Eurozone Bond Yields Rise but Stay Below Monday's Peaks — Market Talk

0716 GMT - Eurozone government bond yields rise slightly but for now remain below Monday's multiyear highs. Selling pressure in global bond markets continues due to persistently high oil prices. These increase inflation concerns and prompt speculation that central banks around the globe will need to raise interest rates. The Federal Reserve is now widely expected to hike rates on Wednesday, following on from the European Central Bank's 25-basis-point rate increase last week. "Bond markets are struggling to gain traction at key levels," with 10-year Bund yields hitting new highs above 3.5%, Commerzbank's Christoph Rieger says in a note. The 10-year Bund yield rises 0.9 basis points to 3.545%, staying below Monday's 15-year high of 3.554%. ([email protected])0708 GMT - Pictet Wealth Management expects a hawkish tone from Federal Reserve Chairman Kevin Warsh at his press conference after the FOMC meeting, reinforcing the central bank's commitment to delivering price stability and anchoring long-end yields. Senior economist Xiao Cui expects the Fed to raise rates by 25 bps to 3.75%-4.00% this week, with dissents likely from Govs. Waller and Bowman. The policy statement is likely to be little changed aside from reflecting the rate hike, consistent with Warsh's preference for a succinct statement and minimal forward guidance, the economist says in commentary. The median dot plot could show two rate increases in total this year [to 4.00%-4.25%], with the risk being no further hikes expected beyond this week. Beyond September, an increase in December may well be warranted, she adds. ([email protected])0704 GMT - Bitcoin declines ahead of a crucial procedural vote in the Senate on proposed legislation that could offer regulatory clarity across digital assets. The U.S. Clarity Act provides a system for digital assets issuance, trading, and regulation. "U.S. regulatory clarity is improving for digital assets as concerns are considered in latest draft ahead of voting," HSBC's Amy Tyler and Ella Hewitt say in a note. Focus is also on the U.S. Federal Reserve's interest-rate decision due on Wednesday, as a rate rise could boost the dollar and weaken dollar-alternative assets. Markets price a 93% chance of a rate increase at the policy meeting, LSEG data show. Bitcoin drops 2.1% to $77,384. ([email protected])0703 GMT - The Bank of Japan's monetary policy is shifting from a stance of cautious normalization after years of ultra-loose policy, to a nimble, proactive response to data and market developments, HSBC's Frederic Neumann says in a note. The BOJ raised rates from early 2024 at a steady, monotonous pace, designed not to rattle markets after years of deflation, the chief Asia economist says. After raising its policy rate only in June, BOJ is expected to do so again later this week to 1.25%. BOJ officials could move yet again in the coming months, he says. As Japan leaves behind its deflation-plagued past, the Japanese yen has shown signs of stabilization and local yields are starting to look attractive, HSBC says. ([email protected]; @kosakunarioka)0700 GMT - Like-for-like grocery inflation in the U.K. accelerated to 2.3% for the four weeks to Sept. 6, up from 2.1% in the prior period, according to Worldpanel by Numerator. Though inflation rose modestly last month, it remained far below levels from earlier this year, said Fraser McKevitt, head of retail at the data provider. Meanwhile, there were 18 million fewer trips to the grocers than July's peak of 497 million visits, the report said. This shift was due to the return to school and work, according to the report. ([email protected])0657 GMT - The U.S. dollar rises as investors anticipate the Federal Reserve will increase interest rates on Wednesday amid elevated oil prices as the Middle East conflict worsens and strong U.S. inflation and jobs data. High oil prices exacerbate inflation concerns, causing yields to rise, additionally boosting the dollar as the U.S. is an oil exporter. "Monetary policy may not be well suited to offsetting the current supply shock, but there's a need to keep inflationary expectations dampened," says BNY's John Velis in a note. Money markets are pricing in a 93% chance of a Fed rate hike this week, LSEG data show. The DXY dollar index rises 0.3% to 99.683, having hit a one-month high of 99.736 on Monday. ([email protected])0626 GMT - The long-term Japanese government bond yield hits a 30-year high, driven by inflation concerns and prospects of the Bank of Japan's faster rate increases. Energy costs are rising with no clear end in sight for the Middle East conflict. The BOJ is expected to raise its policy rate later this week to mitigate risks of higher inflation. Investors are focusing on developments in the Middle East as Saudi Arabia races to repair a critical oil pipeline shut by drone attacks last week. The 10-year JGB yield rises 4.5 basis points to 3.030%, its highest level since September 1996. ([email protected]; @kosakunarioka)0604 GMT - Pimco expects the Federal Reserve to raise rates by 25 basis points this week, with the possibility of further hikes down the line, says economist Tiffany Wilding in a note. Given persistently high energy prices, the volatile situation in the Middle East, and core inflation remaining above 2%, "a few rate hikes to guard against the risk of rising inflation expectations now constitute our base-case scenario," she says. However, if inflation data continue to improve, it is possible that additional rate hikes will ultimately not materialize, she says. ([email protected])0556 GMT - Apart from a widely anticipated 25-basis-point interest-rate hike by the Federal Reserve on Wednesday, "focus will also be on the communication from Chairman Warsh, statement language changes, any shifts in the dot plot (even without the Chairman's participation," Macquarie's David Doyle and Chinara Azizova say. They expect the statement to remain terse, while there may be an upgrade to the description of economic growth and the labor market given recent strong data, the North America economists say. "There are upside risks to the committee's rate projections relative to the June baseline," they add. There may also be some upward movement in the neutral rate projection, "which remains low relative to market pricing." ([email protected])0544 GMT - Whether the Federal Reserve raises interest rates or not, the 10-year Treasury yield is liable to test 5% again, ING rates strategists write in a note. It is up there mostly on account of higher real yields, in fact, they say. "There is not much the Fed can do about that, to the extent that it reflects productivity growth expectations (the good), wider issuance pressure (the bad), or the evolution of the Iran war's effect on oil prices (the ugly)," the strategists write. ([email protected])0542 GMT - U.S. Treasury yields rise across maturities in Asian trade after the 10-year yield rose above 5% for the first time since October 2023 on Monday. Investors await the Federal Reserve's rate decision on Wednesday, with a 25bp hike priced in with a 93% probability, according to LSEG. "Logic would suggest that a rate hike should calm the back end," ING's rates strategists say in a note. "However, the back end is super flighty," they say. The two-year yield is up 4.4 bps at 4.676%, while the 10-year Treasury yield rises 6.2 bps to 5.021%, according to Tradeweb. ([email protected])0540 GMT - China's August economic activity data reinforces Barclays's view that a recovery in domestic demand remains elusive. Consumption is constrained by household deleveraging, property-driven wealth erosion and a weak labor market, the bank's economists say in a report. Investment is weighed down by the prolonged property downturn, retrenchment in capital expenditure across traditional industries, tighter local government finances, and weaker incentives for local officials to pursue aggressive infrastructure expansion. With local governments focusing on project quality, debt management and the completion of existing projects rather than launching new large-scale investments, infrastructure spending is unlikely to return to its previous role as a powerful growth engine, Barclays says. ([email protected])