Weekly Market Outlook

A gauge of U.K. inflation expectations climbed to its highest level of 2016, as the nation’s Brexit decision and a slump in sterling helped push retail prices up in July faster than analysts had forecast.

The 10-year break-even rate, a market measure of expected inflation derived from yield difference between nominal and index-linked gilts, rose to 2.49 percent, exceeding the yearly high reached last week. The so-called five-year, five-year forward inflation rate, among indicators monitored by the Bank of England, jumped 0.06 percentage point to 3.13 percent, compared with its past month’s average of 3.03 percent.

“The breakdown showed that components that typically respond more quickly to exchange-rate movements, such as petrol and food prices, are already putting some upward pressure on consumer-price inflation,” said Ruth Gregory, an economist at Capital Economics in London.

The gap between RPI, which is used to determined the payments linked to inflation-protected bonds, and the consumer price index, to 1.3 percentage points, matching the highest since 2010.

“In the aftermath of a significant deterioration in the exchange rate following the EU referendum there is an understandable focus on the extent and speed of pass-through to inflation,” said Sam Hill, Royal Bank of Canada’s senior economist in London.

First Data

Since this is first month of data following the referendum result, “it is a bit too soon to expect to be able to discern an explicit direct impact,” Hill said. “What is more of a theme though in explaining the gradual uptick in inflation is the fading of base effects in fuel prices with the oil price having stabilized.”

RBC’s Hill said the jump in the RPI-CPI wedge should normalize in coming months, reducing the impact on break-even rates.

Annual retail-price inflation picked up to 1.9 percent from 1.7 percent in June, the Office of National Statistics said in London on Tuesday. Economists had forecast that the rate would stay at 1.7 percent, according to the median estimate in a Bloomberg survey. CPI accelerated to 0.6 percent from 0.5 percent the previous month.

In consumer prices, input costs surged an annual 4.3 percent last month, ending 32 consecutive declines, while import prices jumped the most since 2011.

Pound Weakness

The pound has dropped about 13 percent against the dollar since the referendum. Because of that, the Bank of England expects inflation to reach its 2 percent target faster than previously anticipated, though that didn’t stop it responding to Brexit’s economic threats with new stimulus this month.

The yield on 10-year gilts, which are more sensitive to the inflation outlook than shorter-dated securities, was little changed at 0.53 percent as of 11:57 a.m. in London, while the yield on the U.K.’s 30-year bond fell two basis points, or 0.02 percentage point, to 1.25 percent.


Weekly Market Outlook

U.S. stocks fell from records, Treasuries erased gains and the dollar pared its decline amid hawkish comments from a Federal Reserve official.

The S&P 500 Index pared this year’s rally, while the U.S. currency trimmed a drop of as much as 1.2 percent after New York Fed President William Dudley said policy makers could potentially raise interest rates as soon as next month. Yields on two-year U.S. notes, the coupon maturity most sensitive to Fed policy expectations, were set for the highest level in three weeks. Crude traded near $46 a barrel.

The dollar has lost ground over the past month as lackluster data in the world’s biggest economies fueled speculation the Fed would be slow to raise borrowing costs. While traders now see a 51 percent chance of a rate hike by the end of this year, the odds of that happening next month are only 22 percent, according to federal funds futures contracts. Dudley said such estimates are too low and that “the market is complacent” about the need for rate hikes. With Treasury yields low, the bond market “looks a little bit stretched,” he said.

“The unevenness seen over the last couple of weeks in U.S. data has diminished the relative appeal of pursuing dollar strength,” said Ned Rumpeltin, the European head of foreign-exchange strategy at Toronto Dominion Bank in London. Minutes of the last Fed meeting due this week “will be an important platform to signal whether they hope to keep the potential for a 2016 rate hike on their agenda.”

U.S. home construction unexpectedly accelerated in July to the fastest pace in five months, indicating the housing industry remains an area of support for the economy. Factory production grew at the fastest pace in a year, data from the Federal Reserve showed Tuesday in Washington. Meanwhile, the cost of living was little changed in July, a sign subdued inflationary pressures would give policy makers reason to keep interest rates low.


Bloomberg’s dollar index fell 0.7 percent as of 10:14 a.m. in New York. The yen appreciated 1.2 percent to 100.10 versus the greenback.

The MSCI Emerging Markets Currency Index rallied to the highest since June 25.

The pound rose 0.9 percent to $1.2994, after a Monday close of $1.2880 that was the weakest since June 1985.

Mongolia’s tugrik, the world’s worst-performing currency in August, weakened a 22nd day to 2,243.50 per dollar, the lowest level in Bloomberg data going back to 1993. The currency is suffering as the the nation’s government seeks ways to stabilize an economy it says is in the grip of a crisis.

CommoditiesOil traded near $46 a barrel after the biggest three-day gain since April as Nigeria’s oil minister signaled the prospect of production cuts from OPEC was unlikely.

Gold rallied for a second day as falling equities lifted demand for a haven and the outlook for supportive monetary easing made non-yielding assets more attractive. Nickel dropped 1.6 percent after posting the biggest advance in more than two weeks on Monday.


The S&P 500 fell 0.4 percent, led by technology and utility shares.

As the earnings season winds down, investors will look to results this week from companies including Wal-Mart Stores Inc. and Target Corp. for signs of the health of corporate America and the U.S. consumer. Home Depot Inc. todayposted results in line with estimates. About 78 percent of S&P 500 members that have reported beat profit predictions and 56 percent topped sales projections. Analysts’ estimates for second-quarter net income have improved to a 2.5 percent decline, from a 5.8 percent drop a month ago.

The MSCI Emerging Markets Index rose less than 0.1 percent, heading for the highest close since July 2015. Developing-nation shares have soared about 33 percent from a January low, driving valuations to the highest level in 15 months.

Qatar stocks climbed after FTSE Russell said it would relax the criteria to decide which of the nation’s shares will join its emerging-markets index next month. The QE Index advanced 2.2 percent, its biggest gain since June 7 and the most among more than 90 gauges tracked globally by Bloomberg.

The long-planned stock-trading link between Hong Kong and the mainland city of Shenzhen has been approved, further opening China’s $6.5 trillion equity market to international investors. Chinese Premier Li Keqiang announced the Council’s approval, according to a statement on the body’s website. No further details were revealed.

The Stoxx Europe 600 Index slipped 0.5 percent. A stronger euro hurts European stocks by making exports less competitive. Schindler Holding AG led industrial-goods companies lower, after forecasting a decline in the global elevator and escalator market. Electrolux AB, which gets more than a third of its revenue from North America, slipped after a report showed U.S. shipments of major home appliances fell in July.


The yield on Treasuries due in a decade rose one basis point to 1.57 percent.

The U.K.’s 10-year gilt yield was little changed at 0.54 percent before the Bank of England seeks to buy 1.17 billion pounds ($1.5 billion) of debt due in more than 15 years as part of its expanded quantitative-easing program. The central bank fell short of achieving a similar target at last week’s bond-buying auction, spurring gains in longer-dated gilts.