Oil tops US$100, with ECB decision and US PPI data ahead

Preview: Brent tops US$100 as Iran tensions escalate. Today’s focus is an ECB decision & a market-moving US PPI print.

Market scoreboard this morning

Fuelled by ongoing tensions in the Middle East, Brent crude traded north of US$100/barrel yesterday for the first time since late July. This followed a senior Iranian official signalling that Tehran is gearing up for a more intense conflict rather than yielding to the US blockade and tanker strikes. Overnight, the US said it saw off an attack on one of its warships and destroyed five Iranian tankers, prompting a retaliatory missile strike on a US-linked base in Jordan. Undoubtedly, the risk premium remains elevated as the Strait of Hormuz is all but closed. 

The latest Middle East developments also triggered a sell-off in bonds, sending front-end US yields to fresh YTD peaks – 10s actually clocked their highest level since 2023! The rise in yields was further exacerbated by US Treasury Secretary Scott Bessent’s US$6 billion buyback purchase, which disappointed investors. In FX, the USD index ended unchanged after shaking hands with lows of 98.60. Technically, I do not see much obvious support until around 97.90. For USD/JPY, the pair continues to nurse losses from lows of ¥153. 

In equities, US benchmarks were lower across the board again on Wednesday, as the S&P 500 shed 0.5% and the Nasdaq 100 slipped 0.3%, pulled lower by Nvidia, Amazon and Alphabet. In Asia, regional indices are also underwater. The MSCI Asia Pacific benchmark is down around 0.8%, with Japan’s Nikkei losing 0.2%, South Korea’s KOSPI off by 0.1%, and Australia’s ASX 200 down 1.4%.

ECB rate decision unlikely to deliver much

Today’s ECB meeting lands at 12:15 pm GMT, and markets and economists expect the central bank to increase all three benchmark rates by 25 bps. Alongside the rate decision, we will get the usual statement, a press conference, and updated quarterly economic projections. 

With the decision a near-certainty, I do not expect the rate hike to provide much of a tailwind for EUR/USD. I am also not holding my breath for anything meaningful out of President Christine Lagarde at the presser; she will likely reiterate a meeting-by-meeting approach and remain data-dependent. I believe economic projections will be key to determining the bank's future policy path, and given recent data, I expect upward revisions to GDP and inflation. 

US PPI inflation eyed

15 minutes after the ECB decision, however, markets will turn to the US August PPI inflation data, which will likely dominate the focus. For many experienced hands reading this, you already know we usually get PPI after CPI, and it seldom offers much to get our teeth into from a trading perspective. Nevertheless, it comes out before the August CPI report (released tomorrow) and could therefore move the market’s needle. PPI and CPI are also the last major reports ahead of the Fed rate decision next week.

Economists expect the YY headline print to reach 5.3%, up from 4.8% in July (max/min est. range between 5.8% and 5%), with MM headline forecast to reach 0.4%, up from 0% (max/min est. range between 0.6% and 0.2%). The core numbers look similar. YY is expected to tick up to 4.6% from 4.2% (max/min est. range between 4.7% and 4.5%), while MM is forecast to rise to 0.3% from 0.2% (max/min est. range between 0.4% and 0.2%).

In terms of Fed rate expectations, the OIS curve suggests there remains about a 40% chance that the Fed pulls the trigger and increases the target rate next week, with a total of 37 bps of tightening implied by year-end – that’s one hike and about a 40% probability of another over three meetings!

Ultimately, given the division among Fed officials regarding policy, and with many stating concern over persistent inflation, both PPI and CPI data will be the main determinant of whether markets side with a hold or a hike next week. While CPI will be more widely watched, I believe both prints open the door to scalping opportunities in either direction if there is a large enough deviation to support the move.