Bonds rally on lower oil prices

Lower oil prices contributed to a decent rally in government bond markets, with yields falling across the curve, while equity markets chalked up modest gains. There wasn’t much action in FX though with the main currency pairs little changed on the day. The euro is trading at about $1.1670 against the dollar this morning, which is more or less where it was yesterday morning, while sterling is marginally lower against the US currency at around $1.3635. This in turn leaves EURGBP marginally firmer at £0.8560. US economic data due today include PCE inflation – the Fed’s target measure of inflation – for July, which should garner plenty of attention.

Reports that Iran and Oman are discussing an arrangement to “manage” the Strait of Hormuz contributed to the decline in oil prices. Brent crude was down around 4% yesterday and is lower again this morning at just under $87 per barrel (having closed out last week at almost $95 p/b). Falling oil prices helped trigger a rally in government bonds, with yields in the main markets falling by around 5-7bps across the curve. In equity markets, the Nasdaq led gains for US stocks, closing around 0.7% higher, while European indices added a bit less than half a percent on the day. Attention now is on Nvidia’s results due after the close of US business today.

ECB member Schnabel says, “at the current policy rate (2.25%), inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary,” adding that, “especially in the current environment of resilient aggregate demand, it is critical to prevent the occurrence of second-round effects early on because acting late could necessitate more tightening.” The market expects the ECB to hike the policy rate by 25bps next month and is pricing in a further 25bps increase by April next year.

Fed’s Collins says she was “comfortable” with the decision to keep interest rates unchanged at the July meeting, noting that “this mildly restrictive policy stance” leaves the central bank “well- positioned to address evolving economic conditions and return inflation to target in a reasonable amount of time.” However she warns that, absent a continuing decline in inflation, it will be necessary to tighten policy and raise interest rates.

For the day ahead, as mentioned, the main economic data release is the PCE inflation report for July in the US. The consensus expects the headline rate of PCE inflation to have nudged down for a second month in a row, to 3.6% from 3.7% in June, while the core rate (i.e. excluding energy and food prices) is expected to be unchanged at 3.3%. Other US data due included personal income & spending for July, durable goods orders (also for July), and a second estimate of GDP growth in Q2 – the initial estimate showed the economy grew by 0.4% on the quarter and by 2.1% on the year, after 0.5% and 2.7% respectively in Q1.