Weekly Market Commentary: Rising global government bond yields challenge equity momentum

A strong US jobs report drives global government bond yields higher, challenging investor sentiment

Markets on Friday saw global government bond yields lifted by a much-stronger-than-expected US non-farm payrolls employment report. That strengthened expectations of a US Federal Reserve likely to hold interest rates higher for longer, and in turn, lifting government bond yields, both in the US and elsewhere. Not surprisingly, global equities struggled against this latest headwind – on Friday, the US S&P500 equity index fell -1.54%, while the pan-European STOXX600 equity index dropped -0.84%, both in local currency price return terms.

Markets this week focus on inflation, with US consumer inflation data the highlight, but UK inflation due too

Friday’s US non-farm payrolls for December was up by +256,000 (versus a Reuters survey estimate of +160,000), while the US unemployment rate fell a tenth to 4.1%, versus expectations of no change at 4.2%. The data was enough to reignite concerns that interest rates in the US and elsewhere might have to stay higher for longer. That led to another round higher in 10-year government bond yields, with the US 10-year yield up to 4.76%, its highest closing level since October 2023, while the UK 10-year yield was up at 4.84%, with Friday intraday seeing its highest level since 2008.

As rising bond yields risk a higher cost of capital, investors turn to the latest company results season

The recent US-data-centric feel continues this week, anchored by the next big piece of economic news to land for markets, namely the US Consumer Price Index (CPI) report due out on Wednesday. In terms of expectations, core CPI (excluding energy and food prices), is forecast to have risen +3.3% from a year earlier according to a Bloomberg survey median estimate, and matching readings over the last three months. This following last week’s latest University of Michigan US 5–to-10-year inflation expectations survey which saw a reading of +3.3% in January, the highest since 2008. With UK CPI data also due out this week on Wednesday too, there will be a lot of investor attention on the inflation front this week. 

Later this week, we see the latest calendar quarterly company results season (for Q4 2024) kick off. As is customary, the US banks will lead the way with JP Morgan reporting on Wednesday. With markets currently recalibrating for an expected higher cost of capital following the recent rise in government bond yields globally, investors will be hoping to glean any insights as to how companies might be looking to weather this revised macro climate in their margin and profit outlooks ahead.