Global equities maintained their stability on Tuesday, while the US Dollar regained ground, as financial markets awaited pivotal US inflation data, which could significantly influence the timing and extent of further interest rate hikes by the Federal Reserve.
As traders prepared for key US economic figures and the European Central Bank’s upcoming meeting on Thursday, the United Kingdom reported an increase in its unemployment rate. This development raises doubts about the Bank of England’s expected interest rate hike next week, suggesting it might be the last for the foreseeable future.
Europe’s Stoxx 600 index experienced a modest uptick of 0.27% (.STOXX), with the UK’s FTSE (.FTSE) outperforming with a 0.67% gain. Expectations that the employment data would weaken the British Pound made UK stocks more attractive to foreign investors.
Data revealed on Tuesday indicated a cooling trend in the UK’s labor market during the three months through July. This suggests a slower economy, leading to reduced inflationary pressures and less urgency for the Bank of England to implement further rate hikes.
“I think (the data) underscores the likelihood of just one more (rate hike) and then done for the Bank of England, and more of a bull steepening in the gilt (British government bond) market while we have had bear flattening elsewhere where higher oil prices have dominated the narrative,” commented Chris Scicluna, Head of Research at Daiwa Capital Markets.
Bond yields, which move inversely to prices, exhibited bull steepening, with the two-year gilt yield declining by nearly 6 basis points to 5.02%, surpassing the drop in the 10-year gilt yield, which stood at 4.42%.
The 10-year German bund yield, a regional benchmark, remained stable at 2.62% after recent gains. Meanwhile, the US 10-year yield held firm at 4.278%.
The US Dollar strengthened across the board, with Sterling down 0.25% at $1.2477, while the Euro also dipped by a similar margin to $1.0719, following a brief pause in the Dollar’s ascent driven by movements in Asian currencies.
In Asia, the Japanese Yen registered its most robust performance against the Dollar in two months on Monday. This followed remarks by Bank of Japan Governor Kazuo Ueda, suggesting policymakers may consider raising short-term rates by year-end if economic data supports such a move.
China’s Yuan also experienced its strongest day in six months on Monday, as authorities pledged to address one-way currency movements, and Reuters reported increased scrutiny by the central bank of dollar purchases. Both currencies, however, remain near their weakest levels of the year.
In Asia, investors took solace in news that China’s largest private property developer, Country Garden (2007.HK), secured approval from creditors to extend repayments on six onshore bonds by three years. This development boosted Hong Kong-listed Chinese developers (.HSMPI), though MSCI’s broadest index of Asia Pacific shares outside Japan experienced a marginal decline of 0.15%.
Focus on the Federal Reserve and European Central Bank
The week’s most significant macroeconomic events, the US Consumer Price Index (CPI) release and the European Central Bank (ECB) meeting, are yet to come.
Market expectations for the US CPI, due on Wednesday, are for core inflation to fall to 4.3% in August, although the headline figure is anticipated to rise to 3.6%. OCBC strategist Christopher Wong noted, “A lower-than-expected print may slow the US dollar’s rise while (a) higher print could potentially unnerve risk sentiments as it would reinforce market expectations for further rate hikes, and this could fuel dollar strength.”
Interest-rate futures markets currently indicate a 45% likelihood of another US rate hike by year-end.
Investor risk appetite will also be tested this week as British chip designer Arm Holdings prepares to list in New York, aiming to raise nearly $5 billion.
Meanwhile, the European Central Bank’s meeting on Thursday remains on the radar. Market sentiment leans toward the central bank maintaining steady rates, although the possibility of a 25 basis point hike is still considered.
In the commodities market, Brent crude futures exhibited a 0.45% increase, reaching $91.05 a barrel, while gold held firm at $1,920 an ounce.
