Yields Hit Multi-Year Highs Ahead of ECB Decision

Week of 7 SEPTEMBER

Bond markets stole the show this week, as an oil-driven jump in inflation fears sent borrowing costs to multi-decade highs across the UK, US and Japan. Equities sold off hard as yields spiked, clawed back most of the damage on a dovish Fed signal, then gave some back as a stronger-than-expected US jobs report revived rate-hike bets on Friday.

The week ahead is quieter on data, with US markets closed Monday for Labor Day before the ECB's rate decision and a run of inflation and growth data on Friday.

Week in Review

Bond markets had their most brutal week in years, as an oil-driven spike in inflation fears sent UK and US borrowing costs to levels not seen in decades.

UK 30-year gilt yields hit their highest level since 1998 at 5.89% on Tuesday, while UK 10-year gilt yields touched a 19-year high of 5.29% on Wednesday. US 10-year Treasury yields rose to 4.81%, their highest in nearly three years, and Japan's 10-year yield hit 3% for the first time since 1996. The catalyst was oil: two tankers were reportedly struck in the Strait of Hormuz as tensions between the US and Iran escalated, and Brent crude climbed to a five-week high above $95 a barrel, feeding straight into inflation expectations.

Equities buckled under the weight of surging yields early in the week, before a dovish Fed and a wave of strong tech earnings sparked a sharp recovery.

Rate-sensitive and domestically-focused sectors were hit hardest: the FTSE 250 fell harder than the FTSE 100, and the S&P 500 and Nasdaq both dropped to their lowest levels of the week on Tuesday. Relief arrived on Thursday as the yen rallied and Fed Governor Christopher Waller struck a dovish tone, easing the pressure on yields. Snowflake surged on a strong AI-driven update that offset a disappointing report from Broadcom, and the Nasdaq closed Thursday at its best level since late August.

Friday's jobs data delivered the week's final twist, blowing past forecasts and reviving the very rate-hike bets the week's relief rally had been built on.

US payrolls surged by 162,000 in August, well above the 53,000 forecast, while unemployment held at 4.1% and wages rose 3.1% year-on-year. The US 10-year Treasury yield ticked back up to 4.78% and the odds of a September Fed rate hike jumped to 59% from 52%, pulling gold back down and knocking the S&P 500 and Nasdaq off their Thursday highs. GBP/USD touched a three-week low near 1.3480 before recovering to end the week around 1.3520, while EUR/USD held a tight range either side of 1.16 ahead of next week's ECB decision.

Biggest Market Movers

• UKOIL – gained 8%
• XAUUSD – touched a one-week low
• USDJPY – lost 2.5%
• GBPUSD – touched a three-week low
• BTCUSD – touched a multi-week high near $81,300
• NDQ100 – reached a two-week high
• Broadcom (AVGO) – fell 6%
• Snowflake (SNOW) – surged 23%

Top Events in the Week Ahead

The coming week is lighter on data, with US and Canadian markets closed Monday for Labor Day. Japan's final Q2 GDP opens the calendar Tuesday, before the ECB's rate decision on Thursday and a run of UK and US releases on Friday.

ECB Expected to Deliver a Hawkish Hike

The ECB looks set to keep hiking, with markets pricing in another rate rise as inflation pressure builds across the currency bloc.

The ECB is widely expected to raise rates by 25 basis points to 2.50% at Thursday's meeting, extending its tightening campaign. Markets will watch President Christine Lagarde's press conference for signals on further hikes. A hawkish tone could push EUR/USD towards resistance around its August high near 1.1680, while a more cautious message could see the pair slip towards support near 1.1590.

US Inflation Data Back in Focus

Friday's US inflation print could decide the Fed's next move, landing just as bond markets are at their most sensitive to any upside surprise.

Core inflation is expected to rise 0.2% month-on-month and the headline rate to hold at 3.5% year-on-year. A hotter print would harden the case for a Fed rate hike. Gold is likely to be the most sensitive market to the outcome: a soft reading could send it towards resistance near $4,700, while a hot print could push it towards support near this week's low around $4,400.

UK Growth Data to Test the Pound

The pound faces another test on Friday, with fresh growth data due just as gilt yields sit near their highest levels in decades.

UK GDP, trade and industrial production figures for July give a fresh read on the economy and another data point for a gilt market still digesting this week's sell-off. The pound has already been on the back foot this week, and a soft print would add to concerns the Bank of England has room to stay dovish even as yields climb. Weak data could send GBP/USD towards support near 1.3480, while a positive surprise could help the pair recover towards resistance around 1.3650.

Other Events and Earnings

China's August trade data lands Tuesday, followed by Chinese inflation and producer prices on Wednesday. Thursday brings Germany's final CPI reading and US producer prices, ahead of Friday's preliminary University of Michigan consumer sentiment index.

On earnings, Oracle, Adobe, Kroger and GameStop report in the US, while Dunelm and Associated British Foods update UK investors.