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[MARKET ANALYSIS] Ongoing energy upside and reaction to Chair Powell's hawkishness weighs on fixed income

The fixed income market is under pressure due to Fed Chair Powell's hawkish tone and rising energy prices, with USTs, Gilts, and Bunds all recording declines.

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[MARKET ANALYSIS] Ongoing energy upside and reaction to Chair Powell's hawkishness weighs on fixed income

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  • A bearish session given the hawkish approach taken by Fed Chair Powell and the continued advances in energy benchmarks, with Brent in excess of USD 115/bbl and Dutch TTF firmer by near 30% on the day.
  • USTs were hit by around 15 ticks over the Fed window on Wednesday, ending the day around lows of 111-12. Overnight, some modest further pressure was seen as participants digested the Fed and reacted to continued energy gains (see Commodities for details). Currently, the benchmark is just over a 111-08 trough with downside of around 10 ticks at most.
  • JGBs fell at the start of APAC trade and across the BoJ announcement, and Ueda's presser fell. In brief, the announcement had a hawkish flair with Takata dissenting and voting for a 25bps hike while Tamura outlined that the price stability target will be attained as of FY26. Thereafter, Ueda sparked a hawkish reaction as he pointed to preliminary wage data momentum, potentially showing better performance for small/medium firms than in recent years.
  • Gilts gapped lower by 92 ticks before falling another five to a 88.32 trough. Pressure a function of the above factors. For the UK, we look to the BoE this afternoon, where an unchanged announcement is expected, but we will be particularly attentive to the vote split, policy language and individual explainers for insight into whether the BoE is willing to look through the shock or not in the near-term. Not factoring today, but the morning's jobs report leaned net-dovish, though only marginally overall.
  • Bunds are an echo of the above, lower by 40 ticks at most, hitting a 125.70 trough as Dutch TTF ignites and market pricing turns even more hawkish for the ECB. An announcement that is expected to see rates left unchanged, but for the ECB to no longer find itself in a 'good place'. The forecasts will likely see a lift to inflation and a cut to growth; note, the ECB may elect to provide an 'adverse' set of forecasts, as it did during the last Middle East shock.
Context

This combination suggests that inflationary concerns are escalating, which could influence future rate decisions across central banks, leading to further tightening in monetary policy. Traders should watch for how the BoE and ECB communicate their stances today, as this could provide insight into their responsiveness to rising energy costs and their broader inflation outlook.

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