Markets
The ceasefire and by extension the interim agreement between the US and Iran is under renewed pressure. Iran yesterday attacked three ships that were following an Omani coastline route through the Strait of Hormuz. Tehran, however, said repeatedly it would only allow transit through designated Iranian routes in its attempt to control as much of the waterway as possible. The US responded by revoking the June 21 Iranian oil waiver that allowed the country to sell the product free of sanctions. The US military shortly after conducted a series of strikes targeting 80+ sites, prompting an Iranian tit-for-tat reaction. It serves as a reminder of the fragility of the talks as well as underscores how deep the divide between the parties still is. With the decline in oil prices beginning to look a bit stretched, the recent developments are now triggering a correction higher. Brent is currently trading around $76.5/b compared to $70 levels earlier this month. It also means the likes of the ECB can’t lower their guard just yet. Several policymakers including Lagarde have warned for the risk of a re-escalation of the conflict. Others, including Lane and Schnabel, are worried about price pressures that are still in the pipeline while oil prices and futures have not yet normalized to pre-war levels, even when they were at their lowest. US Treasury yields were already inching higher and drew additional support from the increased oil price. Net daily changes varied between 7.1 and 8.8 bps. European yields added 4–5 bps across the curve and have yet to respond to the geopolitical news flow. Bund futures in any case suggest a higher open for German rates. The US dollar traded with a slight edge compared to global peers, be it in technically insignificant trading. EUR/USD dipped to 1.1412. USD/JPY stabilized around 162.1, just shy of the 40-year lows (for the yen) seen a few days ago. DXY recovered to north of 101. Sterling’s strong rally met with resistance around 0.8544 (50% EUR/GBP retracement on the 2024–2025 rally) and is currently trending lower. The jury’s out whether the honeymoon period has ended. We do pick up yesterday’s warning from the UK’s budget watchdog (Office for Budget Responsibility) in a latest indication that fiscal sustainability is returning as a market-relevant theme. It said the UK’s debt trajectory would move onto “an unsustainable and ever-rising path” in almost all scenarios. Stabilizing debt at 95% of GDP (current OBR baseline) from the end of the forecast horizon (2030–2031) onwards would require spending cuts or tax increases equivalent to more than £100bn a year. Gilts, for that matter, did underperform slightly yesterday (up to +5.5 bps).
News & Views
The Reserve Bank of New Zealand (RBNZ) raised its policy rate by 25 bps to 2.5%. The hike was expected and in some way it was also already flagged in the May policy statement. Inflation risks have eased, and some removal of policy accommodation is warranted as the effects of the price shock will linger for some time and the outlook for medium-term inflation pressures remains uncertain. The RBNZ expects economic activity growth to resume after the Middle East conflict weighed during the April–June quarter. The outlook for medium-term inflation depends on the extent to which recent cost increases will feed through to prices. Some might look to rebuild margins. Especially non-tradable goods inflation was and remains a source of concern. The RBNZ now expects inflation to peak at 3.9% in the June quarter before easing to 3.3% in Q3. In May it forecasted inflation to peak at 4.3% in Q3. The RBNZ guides that some further reduction in monetary stimulus is likely to be required to return inflation to the 2% mid-point target. The market sees a second rate hike by October and an additional step in spring next year. The kiwi dollar rebounds from the 0.5675 area at the start of trading this morning to currently 0.571.
(Geo)political uncertainty both at home and overseas continued shaping higher trends in the June KPMG and REC UK report on Jobs. Subdued business confidence caused firms to prefer short-term staff, with temp billings rising at the steepest rate in over three years. At the same time, permanent staff appointments continued to decline. Overall demand for staff weakened at a quicker rate due to a steeper reduction in permanent job vacancies. Job losses contributed to a further increase in candidate availability. Pay trends improved, with employers raising starting salaries and wages at quicker rates as they sought to attract and secure candidates with sought-after skills. Overall KPMG & REC assessed the report as encouraging, containing some hopeful signs as temporary hiring reacts to demand even as firms are not confident enough yet to commit to larger-scale permanent hiring.
