Oil prices lower, bonds and stocks rally

Donald Trump’s announcement that he was postponing attacks on Iran to allow for talks between the two sides prompted a decline in oil prices and a rally in bonds and stocks at the start of the week. Japan and the US have confirmed that they jointly intervened in the FX market on Friday to support the yen – the US sold euros and bought yen in its intervention operation – and indicated they were prepared to do so again if necessary. The yen is currently trading at around Y158 and Y181 against the dollar and euro respectively, well off its recent lows of circa Y164 and Y187. Meanwhile, EURUSD and GBPUSD are both managing to hold onto a good chunk of the gains they made following last week’s Fed meeting, trading at around $1.1515 and $1.3435 respectively this morning, while EURGBP is little changed from Friday’s closing levels at £0.8570. Looking to the week ahead, the main focus in terms of economic data will be on the US jobs report for July on Friday.

Bonds rallied as oil prices fell – Brent crude is down more than $5 from Friday’s close at just under $85 per barrel – with US and German 10-year yields declining by around 6bps, largely reversing last week’s increase, though UK bonds outperformed as 10-year yields fell by around 10bps on the day. Equity markets also had a positive session. The S&P 500 added around 1.5%, extending last week’s gains (+1%), while the Stoxx Europe 600 closed around 0.5% higher having advanced by around 0.7% last week.

Fed member Williams says he supported last Wednesday’s decision to keep interest rates on hold. His “forecast is for inflation to come down in ⁠the second half of this year and come down further next year” and believes “monetary policy currently is well positioned…to support that disinflationary path.” However he adds that if inflation remains elevated, then it would “absolutely be appropriate (to raise interest rates) to get us on a trajectory that does bring inflation back to 2%.”

Euro area headline inflation nudged up to 2.9% in July, from 2.8% in June, according to Friday’s flash reading, mainly due to a reacceleration in energy price inflation (to 10% from 8.5%), and is now one percentage point higher than pre-war in February (1.9%). Excluding energy, inflation was unchanged at 2.2% last month and is running slightly lower than pre-war (2.4% in February), as a sharp fall in food inflation (to 1.2% in July from 2.5% in February) has more than offset a small rise in core inflation i.e. excluding energy and food over this period (to 2.5% from 2.4%).

For the day head, economic data due include job openings, factory orders and the trade balance (all for June) in the US. Other US releases scheduled for later in the week include the ISM services index (July) tomorrow and, as mentioned, the jobs report (July) on Friday. We will also hear from a number of Fed members over the course of the week.