Global stocks and bonds steady after rate sell-off

European stocks steadied on Thursday as bonds regained some ground after a sell-off the day before on bets that global interest rates would stay higher for longer due to stickier inflation readings.

The dollar softened slightly as U.S. Treasury yields slippedback while commodity prices came under pressure on renewed expectations that the Federal Reserve is unlikely to cut rates any time soon.

The latest slowdown in the global risk rally has come on the back of data pointing to lingering inflationary pressures across major economies and a flood of bond sales lifting yields.

“There are two forces colliding here,” said Ben Laidler, global markets strategist at eToro.

“It’s being driven by the very heavy government bond issuance and markets that are still afraid of interest rates staying higher for longer and sticky inflation.”

But for now, bond markets have steadied, which has supported equity markets in Europe.

The pan-European STOXX 600 rose just under 0.2%, having fallen over 1% on Wednesday. Germany’s, France’s CAC and Britain’s FTSE 100 eked out gains of 0.1%-0.2%.

Wall Street futures were soft, with S&P EScv1 and Nasdaq NQcv1 eminis both shedding around 0.5%.

Germany’s 10-year bund yield, which earlier touched a six-month high at 2.687%, was down 2 basis points to 2.664%. Bond yields move inversely to prices.

Data on Wednesday showed German inflation rose slightly more than forecast to 2.8% in May, ahead of the closely watched wider euro zone bloc’s reading on Friday.

A higher-than-forecast inflation reading on Friday is unlikely to derail the European Central Bank from lowering borrowing costs next week but could have implications for future policy moves.

“The stickiness of services inflation remains a source of concern,” eToro’s Laidler said.

“It’s not enough to stop the ECB from cutting next week but it does call into question how quickly and how far they go after that.”

Markets are pricing in around 60 basis points of easing from the ECB this year, implying two quarter-point rate cuts and around a 40% chance of a third.

The main highlight of the week for markets, however, is Friday’s U.S. core personal consumption expenditures (PCE) price index report – the Fed’s preferred measure of inflation. Expectations are for it to hold steady on a monthly basis.

“If we look at data that has led us to this point, I have a hard time believing a softer-than-expected PCE report will arrive on Friday,” said Matt Simpson, senior market analyst at City Index.

“From this perspective, PCE not ticking higher could be a welcome surprise. But should it heat up further from sticky levels, appetite for risk will be taken out the back for a good kicking.”

U.S. Treasury yields dipped on Thursday having risen over 8 bps the day before, in part due to a weak debt auction. The benchmark 10-year yield was last at 4.5898%, while the two-year yield stood at 4.9601%.

Japanese government bond (JGB) yields notched fresh multi-year peaks on growing expectations that further rate hikes from the Bank of Japan could be imminent.

The 10-year JGB yield peaked at 1.1% in early Asia trade, its highest since July 2011.