Only when the real BOE base rate will be in positive territory the central bank will have achieved a restrictive posture. The real BOE base rates remains at -200bps, and the central bank needs to hike the benchmark rate at least by 100-150bps overall, assuming that inflation will decline in the meanwhile. The 2-year UK swap spread remains elevated indicating that there might be more room for 2-year gilts to rise to 5.50%. That could be enough to see yields resume their rise ahead of the BOE August’s meeting, where the central bank is expected to hike by 25bps. This week’s labour data are expected to see the unemployment rate unchanged and wage data remaining stable at 7.2%.
UK labour data might send yields higher in the UK (IGLS:xlon, GLTS:xlon) Long-term yields are also poised to rise, however recession fears coming from Yellen’s recent comments might weigh on them. That means that front-term yields will continue to soar till the FOMC meeting. Indeed, with the unemployment rate stable and inflation elevated, more tightening might be suitable in the eyes of the central bank. This week, investors’ attention turns to the core CPI numbers on Wednesday and PPI data on Thursday, even if they might not steer away the Federal Reserve from hiking this month. Last week, amid solid labor numbers, two-year yields hit 5.10% for the first time since 2007, and 10-year real yields rose to 1.8% for the first time since 2009. This week’s CPI and PPI numbers are in focus although a July’s FED rate hike is taken for granted by markets (2YYN3, 10YN3) Until then and after, yield and dollar movements remain the key source of inspiration for traders. Having shown resilience amid rapidly rising US real yields, the market is looking to Wednesday’s US CPI print for further guidance. Gold remains stuck in a downtrend with support at $1900 and resistance at the 21-day moving average currently at $1928 ahead of $1935, last week’s post-FOMC peak. OPEC and the IEA will issue their monthly oil market reports Thursday while the EIA will release its Short-term Energy Outlook on Tuesday. Brent crude, stuck in a six-dollar range since May, is currently challenging resistance in the $78.50-75 area and despite continued macroeconomic headwinds, a break may attract additional short-covering and fresh momentum buying from funds. Crude oil: Challenging resistanceĬrude oil prices rose by more than 4% last week in response to tightening market conditions supported by the Saudi production cut and a general improved risk sentiment. Focus this week for USD traders is on Wednesday’s US June CPI release (more below). Elsewhere, GBPUSD rose close to cycle highs well above 1.2800 and EURUSD traded to 1.0973 before the USD consolidated its losses in Monday’s Asiasn session. USDJPY was the biggest mover Friday, trading nearly to 142.00 before finding support. This triggered a steep slide in the US dollar even as risk sentiment remained on the defensive. The US June jobs report (more below) failed to confirm the wild surge in payrolls registered by the ADP payrolls data the prior day. China’s June CPI inflation decelerated to unchanged while PPI fell 5.4% from a year ago, diving deeper into deflation. The Hong Kong Monetary Authority relaxed mortgage financing ratios last Friday but Hong Kong developers pared all the early gains and turned into losses on today’s trading.
The Hang Seng Index rallied 0.6%, snapping a three-day consecutive loss as investors welcomed the People’s Bank of China’s (PBOC) statement last Friday evening that indicated the end of the scrutiny of financial services businesses of China’s internet giants after it imposed fines on Alibaba’s Ant Group and Tencent’s Tenpay. Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Alibaba and Tencent gain as the PBOC ends probes after imposing fines On Thursday, the Q2 earnings season starts with key earnings reports from Delta Air Lines and PepsiCo followed up by Wells Fargo, Citigroup, and JPMorgan Chase on Friday. This week’s key event is the US June inflation report on Wednesday which is going to be important for the direction in the US 10-year yield this week. S&P 500 futures have continued their slide lower in today’s session down 0.4% trading around the 4,413 level in early trading hours following weak trading session in Japan. What is our trading focus? US and European equities (US500.I, USNAS100.I, and EU50.I): The Q2 earnings season is here
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