Oil prices pop higher amid US-Iran attacks
Markets are under pressure at the start of play today amid continuing US-Iran hostilities over the weekend. The two sides are in dispute over whether the Strait of Hormuz is now effectively closed again, but in any case oil prices have popped higher with Brent crude up at about $79 per barrel this morning. In FX, the euro and sterling have both slipped against the dollar to trade at around $1.14 and $1.3380 respectively, down from levels late last week of about $1.1460 and $1.3450. EURGBP is trading at around £0.8525, having shed almost half a penny over the course of last week. Looking to this week, the main economic data release is the CPI report for June in the US tomorrow (Tuesday) – headline inflation is expected to have eased to 3.8% last month, from 4.2% in May, according to the consensus forecast – while Fed Chair Warsh discusses the US economy and monetary policy at the House Financial Services Committee tomorrow also.
Government bond yields backed up last week amid higher oil prices and a resulting firming of central bank rate hike expectations (the market is now pricing in the best part of 50bps of hikes from the Fed, ECB and BoE over the next year or so). German and UK 2- and 10-year yields rose by 10-13bps on the week, while equivalent US yields increased by 8-9bps. In equity markets, European stocks underperformed notably last week with the Stoxx Europe 600 shedding almost 2%; in contrast, the S&P 500 gained just over 1% (led by technology stocks).
ECB member Stournaras says renewed US-Iran attacks “shows how precarious and volatile is the situation in the Middle East and as a consequence, energy prices,” adding that it also “increases the uncertainty surrounding inflation forecasts and therefore the challenges that monetary policy has to face.”
For the week ahead, as well as the CPI report tomorrow, other US economic data due include producer prices and the Fed Beige Book on Wednesday, retail sales on Thursday, and industrial production on Friday, while data scheduled elsewhere include Euro area industrial production for May on Wednesday and GDP for May in the UK on Thursday. Ahead of Warsh’s testimony tomorrow, Fed Governor Waller discusses the outlook for the US economy at an event today.