Risky assets came under pressure this week as energy prices kept creeping higher and the ECB surprised the markets with a hawkish tone. The price of Brent crude touched USD 110 per barrel on Thursday night, highest since mid-May, as news emerged that the Yemeni Houthis had reached control of key port cities and islands near the Bab el-Mandeb strait. Traffic volumes in the strait still seem rather unaffected, but the risk is definitely rising that tankers and vessels will have to opt for the longer route around Africa.
On the back of escalating war against the Houthis, Saudi Arabia crude exports fell to about 3.1Mb/d in August, down from 5.1Mb/d in July, the lowest since 2013. As oil prices stabilised above USD 100 per barrel level, the European benchmark price for natural gas topped EUR 80/MWh level, a multi-year high, as the Polymarket has also priced down the probability of a normalisation in the Strait of Hormuz this year, to 20%.
As energy prices crept higher, so did short-term inflation pricing. Markets now price an average 3.6% inflation for euro area for the coming 12 months and 2.7% for the US. For both regions, inflation expectations are roughly 1 percentage point higher compared to where they were a month ago.
This week, the ECB surprised the markets by taking on a hawkish tone. It stated that “inflation is set to remain well above target for an extended period”, and Lagarde called the much-expected 25bp rate hike a “no-brainer”. We have changed our ECB call and now expect the central bank to hike rates at the upcoming October meeting, as well as in December. We then expect them to hold the deposit rate unchanged at 3% until the end of 2027. Read more on our ECB review: A “no-brainer” hike and more to follow, 10 September.
The main event of next week will be the FOMC meeting on Wednesday. At the time of writing, markets remain divided over the next week’s decision with today’s CPI print potentially a decisive factor. We still expect the FOMC to publish its updated economic projections and ‘dots’, even if Warsh opts out from submitting his personal views again. Read more on Reading the Markets USD – Fed preview: hawkish hold, 8 September.
On Thursday, we expect the Bank of England to keep the Bank Rate at 3.75%, in line with consensus and market pricing. The vote split is expected to repeat July’s 6-3 outcome of hold versus hike. Our forecast is for an unchanged rate until Q2 2027, when we expect the first cut. Risks to our call are to the upside with energy prices and inflation risks rising and the economy looking resilient.
On Friday, we expect the Bank of Japan to hike its policy rate to 1.25%. The move has largely been priced in by investors, and we do not expect Governor Ueda to push against that. We expect the BoJ to signal a nimbler approach to the tightening pace than the very cautious hiking cycle we have witnessed so far. Anything else will weigh heavy on the yen. August CPI print will be released ahead of the meeting.
On the data front, keep an eye on the monthly batch from China and German ZEW index on Tuesday.
