US
Brent crude rallied to $91.85 a barrel, its highest level in more than three weeks, as the US-Iran Strait of Hormuz standoff drags on. We continue to see crude oil prices driving the war narrative, with price swings likely to dictate the pace of escalation and de-escalation. That should keep Brent within a broad $70 to $100 range.
In parrel, the renewed upswing in crude oil price is pushing bond yields higher and worsening already fragile fiscal dynamics. Equity markets are down and USD recovered yesterday’s loss. The risk of further dovish Fed repricing will keep USD rebounds shallow and short-lived.
ADP private employment change for the week ending August 1 will be of interest (1:15pm London, 8:15am New York). While the weekly ADP is poor at predicting monthly NFP change, it does a better job at capturing the broad direction of travel. And it currently points to weakening labor demand.
Second-tier US economic data on deck the rest of the day: August NY Fed services business activity, July import & export price indexes, housing starts, building permits, pending home sales, and industrial production.
The US Treasury International Capital (TIC) data showed that underlying demand for USD remained strong. In the twelve months to June, foreign investors accumulated $1778bn of long-term US securities, eclipsing the -$743bn accumulated US trade deficit over the same period.
Interestingly, foreign investors (private and official) continue to favor US equities over Treasuries. Foreign purchases of US stocks totaled a record $920bn in the twelve months to June compared to just $294bn for Treasuries.
This has led some to argue that the dollar is increasingly vulnerable to an equity market correction, as foreign investors unwind their US stock holdings. We disagree. A broad stock market sell-off would simply encourage foreign investors to rotate back into safe-haven Treasuries, underpinning the dollar’s defensive appeal.
UK
UK June jobs data was soft and indicative of ongoing labor market slack. The unemployment rate was unexpectedly unchanged at 4.9% for a third straight month in June. Consensus and the BOE had 4.8% penciled-in. Moreover, the policy-relevant private sector regular pay growth slowed to 2.8% y/y in June (lowest since October 2020) vs. 2.9% in May. That matched consensus and the BOE’s projection.
The swaps curve continues to price-in 60bps of BOE rate hikes in the next twelve months. That’s too aggressive in our view given the UK’s negative output gap, and leaves rate-hike expectations vulnerable to a dovish repricing. For now, the UK’s favorable growth-inflation mix offers GBP good support.
