Headlines

* BoE signals there’s still work to do as policy turns restrictive

* RBA sees inflation back within target end-2025, soft landing for economy

* Saudi Arabia extends 1mn barrel per day oil cut, may deepen it in future

* NFP: US labour market growth set to slow further in July

FX: USD fell against most its peers halting its three-day win streak. The DXY closed marginally lower at 102.54 hanging back from a four-week high. US Treasuries continued to slump in a move led by the long end. They were on track for their worst week of this year. The 2-year yield tracked sideways above the 50-day SMA at 4.85%.  But the 10-year yield rose nearly 10bps to 4.175%. That was its highest since last November. The 30-year has risen nearly 30bps in just three sessions.

EUR rebounded off one-month lows of 1.0912. It closed modestly higher at 1.0949. Price action was contained with the 100-day SMA acting as support at 1.0918. ECB Governor Panetta commented that underlying inflation was moderating and economic risks were shifting to the downside. He said core inflation was likely to remain little changed over the summer.

GBP was little changed at 1.2709 after the BoE 25bp rate hike. Cable reversed a 0.7% drop to 1.2621. That was its lowest since the end of June. The BoE took rates to their highest since 2008 and left the door open to more hikes if inflation persists.

USD/JPY fell 0.5%to 142.58. The BoJ announced another unscheduled debt-purchase operation for the second time this week. The major is hovering near the middle of its trading range.

AUD rose 0.2% to 0.6551. That checked a two-day decline that took the aussie to two-month lows at 0.6514. The risk mood was slightly more positive. A resolution with China about a barely standoff was also helping. USD/CAD pushed up to the early July highs.

Stocks: US equities closed with mild losses after recovering through the session. The indices were weighed down by the deepening rout in the Treasury market. Investors also digested disappointing ISM Services data. That missed on the headline and saw a rise in the prices paid sub-index.  The benchmark S&P 500 lost 0.2% to 4501. Utilities were the weakest while energy led the gainers. The tech-heavy Nasdaq dropped 0.11% to 15,353. The Dow fell 0.19% to 35,215.

Asian stocks were mixed after the muted Wall Street handover.  Chinese stocks were positive led by gains in the property sector. The Nikkei 225 swung between gains and losses. Dip buyers were in force beneath 32,000.  

US equity futures are in the green. An early boost from Amazon’s strong cloud growth was offset by disappointment after Apple reported lower iPhone and product revenue. That was its third straight quarterly decline in sales. The shares are down 2% after hours while Amazons’ have jumped over 8%. European equity futures are higher this morning (+0.3%). The Euro Stoxx 50 closed down 0.7% yesterday.

Gold settled marginally lower printing a doji candle. The precious metal is set for its worst week in six. A strong of solid economic data has not helped.  Surging bond yields driven to nine-month highs have also hurt gold bugs. Rising bond yields dampen the appeal of non-yielding gold which pays no interest. All eyes are on today’s NFP report.

Event Takeaway – BoE hikes and will likely do so again

There weren’t any major surprises with yesterday’s Bank of England meeting. The recent positive inflation surprise meant a downshift in hiking gears. There is growing dissent within the MPC which seems inevitable as we get closer to the end and turning point for the cycle. Two members voted for a 50bp hike and one for a hold.

The bank’s forecasts now point to inflation returning to target by 2025. This projection assumes no more hikes over the coming months. But ultimately, Bailey left the door open to additional tightening. Markets are betting on a peak rate at 5.75%. That means two more 25bp moves. The key question is how persistent inflation will be. Headline CPI is currently nearly four times the bank’s target. Cable rebounded after the meeting, though this was more to do with USD weakness.

Chart of the Day – NFP to (hopefully) spark gold volatility

Bloomberg consensus forecasts headline NFP to remain near 200k. That’s after gains of 209k in June. The unemployment rate is likely to remain steady at 3.6%. Average weekly earnings are expected to slow to 0.3% m/m and 4.2% y/y from 0.4% and 4.4% previously. There is more data due before the September FOMC meeting. That means the market may not read too much into this month’s report.

But more weakness in wages and the headline could underpin some support for gold. Surging yields need to slow and reverse for a more protracted move higher. The 50-day SMA is initial resistance at $1952. Support is a minor Fib level at $1934. The June low sits at $1893.