Falling oil prices buoy markets
A continuing fall in oil prices contributed to a decline in government bond yields, a rally in equity markets, and a modest weakening of the dollar. The euro is trading at around $1.1250 against the US currency this morning, while sterling is trading at about $1.3475 and £0.8350 against the dollar and euro respectively ahead of the Bank of England’s (Boe) interest rate decision at noon today. With the UK economy proving more resilient than expected and inflation heading higher following the recent spike in wholesale energy prices, the BoE looks certain to raise rates by 25bps to 4.0%, though there may be one or two dissents in favour of keeping policy on hold, while some increase in rates is probably likely beyond today too. Market expectations for further hikes have been pared back lately, though there’s still about 90bps in total (including today’s 25bps increase) priced in by September next year. We might have a better idea whether this is reasonable following today’s meeting.
The decline in oil prices triggered by Trump’s comments earlier in the week – that he was inclined to hold off from attacking Iran for now – continued yesterday. Brent crude fell by another $10 or so to around $95 per barrel, its lowest level in a couple of months. Lower oil prices spurred a fall in bond yields and a rally in stocks. US and German 10-year government bond yields both fell by around 6bps on the day, while there were larger declines in equivalent UK and French yields, of the order of 13bps and 18bps respectively. In equity markets, the Dow Jones led the rally in US indices, gaining around 3%, with the S&P 500 and Nasdaq both adding circa 1.5%, while European stocks were around 2% higher on the day. The positive sentiment is continuing this morning with European stocks up 0.5% at the open.
Headline CPI inflation in the Euro area nudged up to 4% in October, from 3.8% in September, according to yesterday’s flash reading, due to rising energy prices and a pick-up in food price inflation last month, while core inflation – which excludes energy and food prices – was unchanged at 2.5%. Since February this year, which was just before the start of the Iran war, headline inflation has risen by just over 2 percentage points, from 1.9%, but core inflation is essentially unchanged over this period, having been running at around 2.4% back in February, indicating that to date at least, indirect effects from the energy price shock have been limited.
For the day ahead, the focus will be on the Bank of England meeting, and particularly what it might signal about interest rate hikes beyond today, while on the economic data front, producer prices for September are due in the Euro area and unit labour costs (Q3) and weekly jobless claims are scheduled in the US. There are a number of ECB and Fed members due to speak over the course of the day.