Bank of England hikes again

The Bank of England hiked policy rates by 25bps at its August MPC meeting, taking the Bank Rate to 5.25%. Two members of the MPC actually voted for an additional 50bps hike while one voted for no change. The BoE kept the possibility of further rate hikes open, noting that if there was “more evidence of persistent pressures, then further tightening of monetary policy would be required.” Beyond the scope for another hike, the BoE looks to be in no rush to switch its policy stance, saying that rates will be “sufficiently restrictive for sufficiently long.”

The ISM services index dropped to 52.7 from 53.9 thanks to weakness across multiple sub-components. The manufacturing index released earlier in the week showed that sector still in contraction and with a services slowdown, it suggests that Q3 has started on a particularly soft footing. Prices paid in the services index did rise, however, but is close to the lowest level since the post-pandemic inflation surge began.

Initial jobless claims for the week ending July 29 rose to 227k, up marginally from 225k. Continuing claims showed a bigger increase for the week prior, up by 21k to 1.7m. The signs of slowdown in the labour market aligns with what some other near-term indicators suggest even as headline employment growth numbers remain strong.

Inflation in Turkey accelerated in July to 47.8% y/y, up from 38.2% a month earlier. Monthly inflation was its fastest level since January 2022 at 9.5%. A hike in fuel taxes helped make transport costs one of the largest components of the overall rise in prices. But core inflation also accelerated, rising to 56.1% y/y from 47.3% previously. The central bank in Turkey expects inflation to end the year at 58% suggesting more rises in the CPI from here on.

Egypt’s central bank hiked policy rates by 100bps overnight, taking the deposit rate to 19.25%. Rates are now higher than they were during the last hiking cycle in Egypt in 2016-17. Egypt’s MPC noted that “risks surrounding the inflation outlook” warranted another rate hike as a depreciation in the level of the EGP since the start of the year will keep price pressures high. Inflation in Egypt hit 35.7% y/y as of June.

Saudi Arabia recorded a deficit of SAR 5.3bn in Q2, an 80% increase on the deficit recorded in Q1. Non-oil revenues rose by 32% to SAR 135bn but the gains were substantially offset by only marginal q/q increases in oil income to SAR 180bn. Expenditure was higher by 13%.

Today’s Economic Data and Events

16:30 US Non-farm payrolls July: forecast 200k

16:30 US Unemployment rate July: forecast 3.6%

Fixed Income

• The hawkish tone from the Bank of England helped to push the long end of the UST curve lower with yields on the 10yr rising by about 10bps on the close to 4.1751%. The front end was choppy but closed near unchanged at 4.881%, helping to steepen the curve by about 10bps to -70bps.
• Gilt yields closed higher by almost 7bps as the BoE prepares to keep rates high for some time. Yields on 10yr gilts added almost 7bps to 4.461%. European bonds generally closed weaker with 10yr bund yield adding 7bps to 2.598%.
• Turkey’s 10yr USD Eurobond closed slightly weaker overnight with yields up 1bps at 8.238%. While inflation in the country accelerates in July, the central has said it would only raise rates in a gradual manner. Egypt’s 10yr USD international bond dipped overnight with yields up 40bps to 16.288%.

FX

• Markets swung marginally away from the dollar overnight though gains were muted. EURUSD rose 0.1% to 1.0949 while GBPUSD failed to get a lift from a hawkish Bank of England, closing at 1.2709, nearly unchanged. USDJPY was the standout among majors, rising by 0.5% to 142.58.
• Commodity currencies closed mixed but with relatively muted action. USDCAD ended the day flat at 1.3353 while AUDUSD rose by 0.2% to 0.6551 and NZDUSD settled slightly lower at 0.6077.

Equities

• Global equity markets sold off overnight as risk sentiment remains tetchy. The Dow Jones fell 0.2% along with a near 0.3% drop in the S&P 500. The NASDAQ fared a little better, limiting its losses to 0.1%. European markets closed more steeply negative: the EuroStoxx 50 index fell 0.7% while the FTSE 100 closed lower by 0.4%.
• Asian markets have opened up on a mixed footing in early trade today with the Nikkei showing a negative bias while the Hang Seng and CSI both up strongly, either side of 1%.
• In the region, the Tadawul dropped 0.9% overnight while markets in the UAE also fell. The DFM index closed lower by 0.8% while the ADX dropped 0.6%.

Commodities

• Oil prices closed higher overnight, helped by Saudi Arabia extending its voluntary 1m b/d of production cuts into September. Russia also committed to holding back on exports though it would moderate some of its cuts. Brent futures added 2.3% to USD 85.14/b while WTI rose by 2.6% to USD 81.55/b. Both contracts are on track for a sixth consecutive weekly gain.