Interest rate uncertainty keeps pressure on US bonds

Significance The Fed and ECB seem set to diverge, with the latter expected to cut rates in June. There is a rising prospect, bolstered by the resilient US labour market and Middle East tensions that threaten higher oil prices, that the Fed might not cut rates at all. Impacts Foreign investors have withdrawn USD9bn from EM bond funds in 2024 after steady outflows in 2023; further modest outflows are likely. The yen is weakening on expectations of US rates staying high for longer, despite the appreciating effect of Japanese interest rates rising. Signs of economic stabilisation in China are firing a tentative stock market rally, with the CSI 300 index up over 10% from early February. The last part of the battle to curb inflation will be made more difficult for the rest of 2024 as base effects will be less favourable.