US CPI to set the tone

Danske Research Team Danske Bank A/S

In focus today

Today's most important data release will be the US July CPI, where we forecast headline inflation at 0.2% m/m SA, 3.4% y/y (prior: -0.4% m/m, 3.5% y/y) and core inflation at 0.2% m/m SA, 2.5% y/y (prior: 0.0% m/m, 2.6% y/y). Inflation was broadly lower-than-expected in June, and markets are now pondering whether it marked the beginning of a trend, or just a one-off.

The remaining part of the calendar is relatively thin. We receive final headline inflation from Germany and Italy, as well as consumer confidence figures out of Norway.

Economic and market news

What happened overnight

In commodities, Brent crude yesterday briefly climbed above USD 90/bbl before reversing course, as headlines from Pakistan suggested the US and Iran may be close to some form of deal. On the news, Brent crude fell back to around USD 87/bbl. However, overnight fresh attacks on shipping renewed concerns over regional escalation. Reports of a suspected Houthi attack in the Bab el-Mandeb Strait and a US strike on a vessel in the Gulf of Oman have added to uncertainty causing Brent crude to climb back towards USD 90/bbl. Although deal optimism is fading, any renewed diplomatic progress could quickly pull attention back towards last week's low near USD 80/bbl.

What happened yesterday

In the US, the NFIB Small Business Optimism Index increased 2.4 points to 99.8 in July. Notably, labour market-related indicators strengthened, with more firms reporting job openings they were unable to fill, while three-month hiring and capex plans also moved higher. This contrasted with actual employment changes which remained low, in line with the earlier NFP data. Quality of labour was the most frequently cited "single most important problem", suggesting that forward-looking labour market indicators are improving despite recent weak realised data.

Equities: Global risk sentiment was on a weak footing yesterday with the oil price and the SoH being the key market driver ahead of today's US CPI. Early optimism after comments from Pakistan's defence minister suggesting progress towards reopening the strait briefly lifted risk appetite, with US futures 0.2% higher before open, however the mood faded as Iran reiterated that the strait would remain closed and Trump maintained a hardline stance. Brent crude ended 2.6% higher and is trading at USD90/barrel this morning. S&P500 ended 0.3% lower, with Nasdaq 0.6% lower. Energy was unsurprisingly at the top of the table, with communication services (dragged by Alphabet) lower. Overnight, Asian equities and US futures are mostly in green.

FI and FX: Major FX crosses were relatively steady yesterday. SEK and JPY lost a little ground while the USD recovered. News related to the Middle East and the oil market dominated with brief hints that a deal might draw closer. Oil prices remained elevated which underpinned the NOK. Bond yields dropped across the curve following equity market declines.

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

AUD/USD flirts with 0.7000, lowest since early August amid bullish USD

AUD/USD hits a fresh low since early August during the Asian session on Friday and looks vulnerable near 0.7000 after breaking below the 200-day SMA overnight. Against the backdrop of the hawkish Fed, a two-day rally in oil prices revives inflation fears and continues to push US bond yields to multi-year highs. Adding to this, geopolitical risks lift the US Dollar to a two-month high, overshadowing RBA rate hike bets and weighing on the pair.

USD/JPY pulls back from three-week high after failing near 159.00

USD/JPY edges lower during the Asian session on Friday, stalling its recent strong move to a three-week high of 159.00 as Japanese Yen bears turn cautious amid intervention fears. Meanwhile, the US Dollar retains a strong bullish undertone as the Fed's hawkish outlook and oil-driven inflation fears continue to push US bond yields to multi-year peaks. Furthermore, the BoJ's dovish rate hike last week might cap JPY and support spot prices.

Gold treads water below $4,300

Gold grabs some buying attention and advances marginally at the end of the week, partially retracing the weekly decline, although it is still navigating below the key $4,300 mark per troy ounce. The fresh selling bias on the Greenback and the modest decline in US Treasury yields appear to support the humble advance in the precious metal.

Crypto Today: Bitcoin and Ethereum edge lower, XRP extends recovery as macro headwinds weigh

The broader cryptocurrency market is consolidating on Friday, with Bitcoin paring losses slightly above $84,000. Ethereum declines in tandem with BTC. Ripple (XRP), meanwhile, paints a different picture.

Fed vs BoJ: Both hiked. The market only believes one of them – and the chart shows which

The Federal Reserve (Fed) and the Bank of Japan (BoJ) have just done something remarkably similar. Both central banks raised interest rates by 25 basis points (bps) last week, both are confronting inflation risks, and both signal that future decisions will depend on incoming economic data.

Fed vs BoJ: Both hiked. The market only believes one of them – and the chart shows which

The Fed and the BoJ have just done something remarkably similar. Both central banks raised interest rates by 25 bps last week, both are confronting inflation risks, and both signal that future decisions will depend on incoming economic data.