Bank of England cuts rates

The Bank of England lowered its bank rate by 25bps yesterday, with the first cut since the Covid-19 pandemic taking the benchmark rate down from 5.25% to 5.00%. The decision was a close one, with five of the voting members wanting to cut by 25bps, outweighing the four members wanting to hold. The bank’s statement noted that the MPC expects that ‘domestic inflationary persistence’ will fade on the back of restrictive monetary policy. Headline CPI inflation has been on target at 2.0% in May and June, supporting the MPC’s decision. However, with services inflation still high, Governor Andrew Bailey cautioned that the path would be cautious, and that the BoE needed to be ‘careful not to cut interest rates too quickly or by too much.’

The OPEC meeting yesterday concluded with no change to policy, and reiterated the previous stance that some of the oil production curbs could start being unwound from October this year. This is dependent on market conditions, but statements from participants were fairly bullish around the demand outlook over the coming months, despite some soft data out of China.

US initial jobless claims came in at 249,000 in the week ending July 27, up from 235,000 the previous week and higher than the predicted 236,000. There has been some softening in recent labour market data, as underlined by Jerome Powell post the FOMC meeting earlier this week. All eyes will now be on the NFP report due later today, where the forecast is for a net gain of 175,000 jobs, down from 206,000 last month.

Key Economic Data and events

16:30 US change in nonfarm payrolls, July. Forecast: 175,000

16:30 US unemployment rate, July. Forecast: 4.1%

Fixed Income

• The recent rally in USTs continued post the FOMC meeting earlier this week, which paved the path for a September rate cut.
• The 2yr yield fell 11bps to 4.1482%, marking the fourth straight of declines and touching levels last seen 14 months ago. The 10yr fell 5bps to 3.9760%, the first close below 4% since February.
• UK gilts also rallied after the Bank of England cut the bank rate for the first time since the pandemic. Yields on the 2yr fell 11bps to 3.721%, while the 10yr yield dropped 9bps to 3.882%.

FX

• Sterling fell against the dollar yesterday after the BoE cut, ending the day at 1.2739, levels last seen in early July. EUR also fell against the greenback, dropping 0.3% to 1.0791.
• On the other hand, JPY continued to strengthen back from its multi-decade low after the BoJ hiked the target rate this week. It closed up 0.4% at 149.36.

Equities

• Asian equity markets saw strong gains yesterday. The Shanghai Composite ended the day 2.1% higher, while the Hang Seng added 2.0%. In Japan, both the Nikkei and the Topix closed up 1.5% but there has been heavy selling so far this morning.
• In the US, weak earnings reports from tech giants weighed heavily on the three major indices. The tech-heavy NASDAQ was worst-hit, dropping 2.3%, while the S&P 500 fell 1.4% and the Dow Jones 1.2%.
• Locally, the DFM and the ADX both closed up 0.3%.

Commodities

• Oil prices fell back again yesterday as demand concerns took over from the headline driven spike the previous day. Brent futures dropped 1.5% to USD 79.5/b, while WTI ended the day 2.1% lower at USD 76.3/b. Both benchmarks are trading higher so far this morning.