Bond markets remain under pressure
Oil prices are moving higher this morning – Brent crude is up to around $107 per barrel – after Trump publicly rejected an offer from Iran that would have temporarily “reopened” the Strait of Hormuz. This will keep the pressure on bond yields, which backed up quite sharply last week notwithstanding a respite of sorts on Friday, and should also support the dollar. The euro and sterling shed around 1 cent and 1.5 cents against the US currency last week respectively and kick off this week trading at around $1.1380 and $1.3240. EURGBP was confined to a narrow range last week and is hovering around the £0.86 level at the start of play this morning. For the week ahead, economic data releases of note include a flash inflation reading for September in the Euro area on Friday – headline inflation is expected to have accelerated to 3.7% this month according to the consensus forecast – and PCE inflation for August and the employment (payrolls) report for September in the US on Wednesday and Friday respectively.
Government bond yields rose quite sharply last week amid a firming of central bank rate hike expectations. US yields increased by 10-16bps across the curve, while German and UK yields were up to 10bps higher on the week. Equity markets proved relatively resilient in the face of rising yields, with the S&P 500 gaining just over 1% and the Stoxx Europe 600 adding just over a half a percent.
Bank of England Governor Andrew Bailey has indicated that a hike in interest rates may be in the offing at the MPC’s November meeting. In remarks on Friday, he noted that “it’s going to get harder to maintain that stance (i.e. keeping rates on hold) the longer we have high energy prices for,” adding that “we can’t, as monetary policymakers, wait to get the full evidence on the second-round effects (from the energy price shock) to make that call because by then it’s going to be too late.”
ECB member Vujcic says the key risk for the inflation outlook is “higher for longer energy prices,” which is “why there has been this repricing” of (market) interest rate expectations.
He notes that “it’s quite clear now that for the foreseeable future we will not see refining capacity coming back to the levels where it was before this conflict,” hence energy prices, particularly diesel prices, will probably stay elevated for longer and in turn feed into higher consumer price inflation.
Looking to the week ahead, as mentioned, key economic data releases include Euro area CPI inflation on Friday and US PCE inflation and payrolls on Wednesday and Friday respectively. Also of note is the ISM manufacturing index for September in the US on Thursday. There are a number of Fed/BoE/ECB members due to speak over the course of the week.