A light week for data so the headlines drove the market last week:
- The Iran-US war has reignited, halting negotiations and slowing oil flows through the Strait of Hormuz again. This has pushed inflation expectations back up, resulting in the market pricing in at least one hike before year end from each of the Bank of England, ECB, and Fed.
- Fed minutes showed members indicating that hikes would be warranted if scenarios arose in which, assuming stable labour market conditions continue, “inflation would remain elevated due to strong AI-related demand, the conflict in the Middle East, or the effects of tariffs.”
- The market is now pricing in 91% chance of a hike by the Fed in September, with a fully-priced cut by October, and 97% chance of a second by April 2027.
- EU PPI data for May exceeded market forecasts of 5.7%, with the 5.9% recorded being the strongest rate of increase since March 2023. Lower oil prices in June may see a fall next month, but renewed hostilities may slow the pace of any reductions thereafter.
- German industrial production rose 0.9% in May, up from 0.2% in April, which followed four months of contraction manufacturing sector. The jump was driven mainly by a 3.6% increase in automotive output. The annual growth rate was still only flat, but the data is moving in the right direction.
- These combined to shift the market implied likelihood of an ECB hike in September from 56% to 93% over the last week, and the chance of a hike in 2027 from just 6% to 83%.
- UK politics dominated the news in a light data week, but the likelihood of Bank of England rate increases shifted with its central bank peers.
- A full hike was only just priced in by June 2027 at the start of last week, but that has accelerated to November now, with a second 99% priced in by the June meeting, according to the market.
Source: Bloomberg; pricing as per 13 July
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