Stocks, bonds decline as US Treasuries fall overnight

Fed comments and inflation data weigh on markets.

Stocks fell and bonds retreated, tracking a drop in US Treasuries overnight after weak debt auctions and hawkish remarks from a Federal Reserve speaker.

Europe’s Stoxx 600 slipped 0.3% at the open and futures pointed to a similar decline on Wall Street. UK 10-year yields added four basis points while those on similar-maturity German debt pulled back from a six-month high after regional inflation prints came in lower than the monthly estimate for the national figure.

Markets are feeling the ripples from a rough US session, after tepid demand for US note sales, resilient consumer confidence data and central bank talk fueled expectations interest rates will stay elevated. There’s an auction of seven-year Treasuries later Wednesday and an important US price growth print is in focus at the end of the week.

“The higher-for-longer bond yields risk is biting into equity valuations and short-term pressure seems to be a given,” said Leonardo Pellandini, an equity strategist at Bank Julius Baer. “Nevertheless, with inflation expectations moderating and interest-rate cuts coming soon, we think markets can continue to climb higher.”

After jumping nine basis points on Tuesday, 10-year Treasury yields inched higher to 4.56%.

Friday sees the release of the Fed’s preferred inflation gauge — the personal consumption expenditures index. Economists expect the PCE deflator to have risen in April at an annual pace of 2.7%, the same as in March.

“One potential banana skin is that major downside surprises in inflation could now bring in the view that the US economy could not be in as strong shape as previously expected — i.e. ‘bad news is bad news’,” Geoffrey Yu, senior strategist at Bank of New York Mellon.

Fed Chair Jerome Powell and his colleagues have stressed the need for more evidence that inflation is on a sustained path to their 2% goal before cutting the benchmark interest rate.

Oil extended gains as another attack in the Red Sea added to heightened geopolitical tensions in the Middle East ahead of an OPEC+ meeting on the weekend. West Texas Intermediate climbed above $80 a barrel.

Corporate Highlights:

The parent company of Royal Mail has agreed to a £3.6 billion ($4.6 billion) takeover by Czech billionaire Daniel Kretinsky, setting the scene for a political battle over the future ownership of Britain’s postal service.
ConocoPhillips is in advanced talks to acquire smaller rival Marathon Oil Corp. which would extend the oil industry’s spree of major deals, the Financial Times reported.
BHP Group is seeking more time to discuss its $49 billion takeover plan with Anglo American Plc and outlined a series of commitments to the smaller company, with just hours left to go until a crucial deadline.

Key events this week: