The tug-of-war between bonds and equities could take another twist

Mark this one on your calendars, because this could be the decider for risk sentiment by the end of this week.

When bond yields spiked at the end of January, it started causing a stir in the equities market but the rout only began after we got a report related to inflationary pressures - which confirmed that the move in the bond market was justified. And that report was the US non-farm payrolls report where we saw earnings/wages hit the highest growth since the financial crisis.

That day saw US equities had its worst run since June 2016.

Inflationary pressures is going to be the next thing to watch in markets. Central banks are relying on it heavily to adjust monetary policy, and the bond market is responding accordingly as we start 2018 - and we've already had a glimpse of the spillover effects last week.

So, be prepared. If real signs of inflation (data points) are actually being realised, it's probably a good time for investors to rethink the whole bonds vs equities picture and the possible spillover to other markets - if they haven't already that is, after what has happened in the past week.

Anyway, here is what is expected for the US January CPI figures when they are released on 14 February (Wednesday) at 1330 GMT:

  • CPI m/m expected +0.3%
  • Prior m/m +0.1%; revised to +0.2%
  • CPI y/y expected +1.9%
  • Prior y/y +2.1%
  • Core CPI m/m expected +0.2%
  • Prior m/m +0.3%; revised to +0.2%
  • Core CPI y/y expected +1.7%
  • Prior y/y +1.8%