Oil price rises to its highest since April

OVERNIGHT

Asia-Pacific equity markets are down this morning with one gauge pointing to the biggest decline in 4 months. The drop has been led by tech stocks. The downgrading of the US’s credit rating by Fitch Rating, which criticised the country’s ballooning fiscal deficit, may also have helped sour sentiment. Oil prices have continued to climb hitting their highest level since April.

In the US, Atlanta Federal Reserve President Bostic, who is a non-voter on monetary policy decisions this year, said he anticipates that interest rates will be left unchanged at the Fed’s next update in September. Bank of Japan Governor Ueda in a speech emphasized the need for continued easy monetary policy in Japan. He said they were still some way from raising interest rates.

THE DAY AHEAD

The economics calendar for the rest of today is very sparse with no official data set to be released in the UK, Eurozone or the US. That means there will be little to divert markets from speculating about the outturn of Thursday’s Bank of England monetary policy update. Current market pricing sees another interest rate hike as a virtual certainty, but a 25-basis point increase is regarded as more likely than a second consecutive 50bp rise. Meanwhile, a survey by Bloomberg of 56 economists showed 41 of them expect a 25bp hike.

In the US, the July ADP survey of private sector employment will as usual be watched for indications of the likely outturn of official employment data due on Friday. We forecast a 190k rise in the ADP measure. However, it should be noted that even after a revamp it has not proved to be a reliable preview of the official payrolls series in recent months. Last month it over-predicated payrolls by almost 350k although more generally prior to that it had proved to be an under predictor.

The China Caixin services PMI for July, to be released early Thursday, will provide further evidence on whether the post Covid restrictions rebound is faltering. The other July China PMIs have suggested that activity growth is slowing or even falling, which has raised expectations that more stimulus measures may be forthcoming. In Australia, following the central bank’s decision to leave interest rates unchanged, the latest retail sales report is expected to show a fall in sales volumes in Q2 for the second quarter in a row.  

MARKETS

Bonds came under pressure yesterday. US 10-year Treasury yields moved back above 4% possibly reflecting the news of the Fitch downgrade, while UK 10-year gilt yields touched 4.40%. Meanwhile, in currency markets, sterling lost some ground versus both the euro and the US dollar. There are no major events today that seem likely to meaningfully impact on market sentiment, but tomorrow’s BoE update and Friday’s US labour market data could be significant for both bonds and currencies.