Bond markets showed signs of recuperation on Thursday as yields in both the United States and Japan eased marginally, but the broader outlook for fixed-income investors remains uncertain. Oil has held above $90 a barrel amid an escalation of strikes between the U.S. and Iran, reinforcing inflationary pressures that have pushed central banks toward tighter policy settings.
Market pricing has shifted notably in recent days. The probability that the Federal Reserve will approve a 25-basis-point increase at its next decision has risen to roughly 67% from about 37% a week earlier, according to the CME Group's FedWatch tool. That change reflects markets responding to evolving inflation risks and recent moves in long-term yields.
Federal Reserve Bank of New York President John Williams offered a more measured perspective on Wednesday, suggesting that higher long-term yields are - at least partially - a sign of a solid economy and that he would like to see additional data before committing to a rate decision. The data calendar is front and center: ADP employment figures released on Wednesday underwhelmed expectations, but attention now turns to Friday's nonfarm payrolls report, which is regarded as the more reliable monthly gauge of U.S. labor market conditions. The next major inflation print will be the consumer price index on September 11.
On the speaking docket for central bank watchers, Federal Reserve Governor Christopher Waller is scheduled to address a Reuters NEXT event at 1230 GMT on Thursday in Washington. Waller previously indicated in July that higher rates might be necessary in the near term, and his remarks will be parsed for any change in tone or emphasis.
Inflation worries are not limited to the United States. Both the European Central Bank and the Bank of Japan face their own price dynamics. New data released on Thursday showed Japan's services sector expanded at its strongest rate in five months in August, a development market participants say adds to evidence the economy may be resilient enough to tolerate a Bank of Japan rate increase.
The yen has strengthened, climbing to a three-week high following a stronger session on Wednesday that sparked speculation about a potential policy reassessment by Japan's central bank. Japanese government bonds, which have been at the center of recent strain in global debt markets, received some relief after a 30-year auction drew decent demand. Benchmark 10-year JGB yields backed off from the 30-year peak of 3.015% reached on Wednesday.
In corporate news, Broadcom said after the U.S. market close on Wednesday that it expects robust sales of artificial intelligence chips for the next two years. Despite that outlook, the company's shares fell by more than 3% at one point in extended trading.
Equity futures were modestly firmer, signaling a cautious tone in risk markets. Pan-region Euro Stoxx 50 futures were up 0.03% at 6,373 while S&P 500 e-minis were up 0.07% at 7,682.8, indicating only small anticipated gains in European and U.S. sessions.
Market participants will also be watching a slate of supply and activity data that could influence yields and risk sentiment later in the day and into the week:
- Bond auctions: France is reopening 10-year, 14-year and 20-year sales, and the UK is reopening a 23-year sale.
- Procurement and activity indicators: S&P PMI releases for France, Germany, the euro zone and the UK.
- Inflation pipeline: Euro zone producer price data for July.
For fixed-income investors, the combination of elevated oil, geopolitical tensions and a packed data schedule means policy expectations remain sensitive to each new release and remark from central bankers. While this session delivered a modest pause in yield moves, the underlying drivers that have prompted recent tightening expectations remain in place.
Market implications - The short-term relief in yields does not resolve the main tensions confronting bond markets: persistent inflationary signals, central bank inclination toward higher policy rates, and continued geopolitical risk that can disrupt commodity markets and feed into prices. Investors will be watching labor and inflation prints closely for guidance on the path of monetary policy.