Oil prices head further north

Oil prices have risen further as the chances of any immediate agreement between the US and Iran on reopening the Strait of Hormuz seem to have receded. Brent crude is now up at around $90 per barrel, still well off its most recent highs of circa $100 p/b in late July. Rising oil prices contributed to an increase in government bond yields, while equity markets finished flat to slightly lower. In FX, sterling is a touch firmer against both the euro and the dollar, trading at about £0.8545 and $1.3505 respectively this morning, while EURUSD has eased to around $1.1540. The yen, meanwhile, continues to give up some of its intervention-related gains against the dollar, weakening to over Y159, though this is still some way from the levels (Y164) that prompted support for the currency.

Government bond yields backed up as oil prices headed north, increasing by 5-7bps across the main markets (reversing a good chunk of last week’s decline), with UK gilts underperforming slightly on the day. US and UK equity markets ended marginally in the red, while European stocks closed broadly flat.

Fed member Hammack, one of three dissenters who voted for a 25bps increase in interest rates at last month’s monetary policy meeting, suggests that a series of rate hikes may be needed to restrain economic activity in order to bring inflation back down to the 2% target. She says that “one 25-basis-point move probably doesn’t do a whole lot for the economy…so it’s probably some number (of hikes that’s needed), but I don’t want to prejudge what that number is going to be.” The market is currently pricing in about two quarter-point rate increases by the middle of next year. 

Retail sales growth in the UK slowed in July according to the latest survey from the British Retail Consortium (BRC), easing to 1.3% y-o-y (in value terms) from 1.9% in June, while ‘same store’ sales growth dipped to 1% from 1.7%. The BRC notes that “household budgets remain stretched, consumer confidence is fragile, and retailers continue to grapple with rising operating costs.”

For the day ahead, US economic data due include the small business optimism index for July, existing home sales (also for July), and the latest weekly ADP employment report.