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London Quick Take - 7 Sep - Cautious start to trading week as oil rises on US-Iran escalation, key US inflation data & ECB ahead
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
At +162k jobs added, the unemployment rate steady at 4.1% while the participation rate actually rose, and wages rising +0.3% month-on-month, the US economy seems in fine shape and the AI jobspocalypse firmly postponed...the Fed remains short on the inflation side of its mandate and we get the final piece of the puzzle as far as the September FOMC meeting goes with this week’s CPI print. I say last piece of the puzzle but that is not entirely true since we still don’t know the Fed’ reaction function, as underlined by governor Chris Waller’s comments last week. After reaching a four-year high of 4.2% in May, CPI inflation had fallen to 3.4% by July, rising 0.1% on the month. Core CPI, which strips out food and energy, rose 0.2% MoM and 2.5% year-on-year. Markets will likely see +0.2% MoM as enough for the Fed to stay on hold, but the question for the Fed is increasingly not one print but the persistence and durability of inflation when supply shocks are increasingly the norm.
The 2-year Treasury yield briefly rose to a new cycle high in reaction to the jobs data, trading above 4.41% at one point before backing off to around 4.372% ahead of the Labor Day holiday. Market odds imply a 58% chance the Fed hikes next week. After the jobs data President Trump demanded the Fed cut rates or he'll end trade with countries with which the US maintains trade deficits. Even if inflation is hotter than expected, would Warsh dare consider hiking against the will of the President? The data and the September FOMC carry an unusually high degree of risk for the longer-term credibility of the Fed, which matters a lot for the long end amid questions about fiscal dominance and debt sustainability. Before this we have 10yr and 30yr Treasury auctions this week which will be good tests of investor demand, while Treasury's enhanced buyback programme cranks into gear on Wednesday. Full look at the week ahead here.
Escalation in the Middle East are keeping bonds under pressure and the UK 30yr yield trades about +4bps higher at 5.812%, while the 10yr is similarly higher at 5.1%, though both remain down from last week’s multi-year highs at 5.944% and 5.234% respectively. Gold has backed off from last week's highs above $4,500 to trade down closer to $4,400 this morning as yields are higher, though the dollar is failing to get much traction with DXY backing off to test 99 handle support.
German bund yields are also a touch higher after the AfD won victory in a state election, though not moving out in any serious way. Attention is shifting to the European Central Bank policy decision this week, where a hike is firmly expected. The question is whether it’s done with hiking this cycle, and increasingly whether it needs to consider restarting asset purchases because of a worry about spreads. The victory for the AfD underlines the potential for volatility ahead of the French presidential election.
Cautious start to trade ... An unexpectedly strong US jobs print collided with fresh US-Iran escalation to push bond yields and oil prices higher, while stock markets across Europe have taken a wee turn lower, ignoring a rally in Asia. Early losses across London and Frankfurt were around –0.2%, failing to get any support from a decent bounce for Asia tech overnight as Tokyo rose +2%, Seoul +4%, perhaps helped by a fresh injection of liquidity by authorities in China, who are pumping about $53bn into banks and insurers to shore up the financial sector. Wall Street is closed today for the Labor Day holiday, which may keep price action in check.
Brent crude trades up +1% above $97, closer to closing the 25/26 July weekend gap and building on the 8% rally last week after the US military struck three Iranian crude oil tankers over the weekend in retaliation for IRGC ballistic missile attacks on two US Navy warships. Iran subsequently targeted three tankers in the Strait of Hormuz and declared a new restricted zone outside the Strait. The worry is increasingly not the price of crude barrels but the refined products.
Wall Street finished down 0.3-0.5% lower across the three major indices Friday after the nonfarm payrolls report showed the kind of strength that underlined why the Fed does not need to worry about the labour market when it meets next week to decide whether to raise rates or hold them steady. On the whole though I would see this data as good news should be good news - the Fed hiking in September shouldn't derail the bull market materially, and by re-anchoring expectations and getting ahead of the curve it would actually be positive for risk sentiment in the long run. The bull market is based on spectacular earnings growth - 50% in Q2 for the S&P 500, and a couple of 25bps hikes is not about to matter a whole hill of beans, particularly as this is key to re-anchoring expectations and taming long-end rates.
Brent crude trades up +1% above $97, closer to closing the 25/26 July weekend gap and building on the 8% rally last week after the US military struck three Iranian crude oil tankers over the weekend in retaliation for IRGC ballistic missile attacks on two US Navy warships. Iran subsequently targeted three tankers in the Strait of Hormuz and declared a new restricted zone outside the Strait. The worry is increasingly not the price of crude barrels but the refined products.
Wall Street finished down 0.3-0.5% lower across the three major indices Friday after the nonfarm payrolls report showed the kind of strength that underlined why the Fed does not need to worry about the labour market when it meets next week to decide whether to raise rates or hold them steady. On the whole though I would see this data as good news should be good news - the Fed hiking in September shouldn't derail the bull market materially, and by re-anchoring expectations and getting ahead of the curve it would actually be positive for risk sentiment in the long run. The bull market is based on spectacular earnings growth - 50% in Q2 for the S&P 500, and a couple of 25bps hikes is not about to matter a whole hill of beans, particularly as this is key to re-anchoring expectations and taming long-end rates.
At +162k jobs added, the unemployment rate steady at 4.1% while the participation rate actually rose, and wages rising +0.3% month-on-month, the US economy seems in fine shape and the AI jobspocalypse firmly postponed...the Fed remains short on the inflation side of its mandate and we get the final piece of the puzzle as far as the September FOMC meeting goes with this week’s CPI print. I say last piece of the puzzle but that is not entirely true since we still don’t know the Fed’ reaction function, as underlined by governor Chris Waller’s comments last week. After reaching a four-year high of 4.2% in May, CPI inflation had fallen to 3.4% by July, rising 0.1% on the month. Core CPI, which strips out food and energy, rose 0.2% MoM and 2.5% year-on-year. Markets will likely see +0.2% MoM as enough for the Fed to stay on hold, but the question for the Fed is increasingly not one print but the persistence and durability of inflation when supply shocks are increasingly the norm.
The 2-year Treasury yield briefly rose to a new cycle high in reaction to the jobs data, trading above 4.41% at one point before backing off to around 4.372% ahead of the Labor Day holiday. Market odds imply a 58% chance the Fed hikes next week. After the jobs data President Trump demanded the Fed cut rates or he'll end trade with countries with which the US maintains trade deficits. Even if inflation is hotter than expected, would Warsh dare consider hiking against the will of the President? The data and the September FOMC carry an unusually high degree of risk for the longer-term credibility of the Fed, which matters a lot for the long end amid questions about fiscal dominance and debt sustainability. Before this we have 10yr and 30yr Treasury auctions this week which will be good tests of investor demand, while Treasury's enhanced buyback programme cranks into gear on Wednesday. Full look at the week ahead here.
Escalation in the Middle East are keeping bonds under pressure and the UK 30yr yield trades about +4bps higher at 5.812%, while the 10yr is similarly higher at 5.1%, though both remain down from last week’s multi-year highs at 5.944% and 5.234% respectively. Gold has backed off from last week's highs above $4,500 to trade down closer to $4,400 this morning as yields are higher, though the dollar is failing to get much traction with DXY backing off to test 99 handle support.
German bund yields are also a touch higher after the AfD won victory in a state election, though not moving out in any serious way. Attention is shifting to the European Central Bank policy decision this week, where a hike is firmly expected. The question is whether it’s done with hiking this cycle, and increasingly whether it needs to consider restarting asset purchases because of a worry about spreads. The victory for the AfD underlines the potential for volatility ahead of the French presidential election.
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