UK inflation data and US Treasury buyback announcement push yields lower, reshape rate expectations for BoE and ECB. EUR/USD spikes, Riksbank decision next.
Alpha Score of 62 reflects moderate overall profile with strong momentum, weak value, poor quality, strong sentiment.
UK inflation data released Wednesday gave the Bank of England some breathing room. Headline CPI rose to 2.9% in July, matching forecasts. Core inflation came in at 2.6%, a tick above the 2.5% consensus. Services inflation eased to 3.4%, in line with expectations and down from 3.6% in June. Food inflation continued to decline, hitting 1.2% from 1.6%. The print, combined with Tuesday's soft labour market data, trimmed rate hike expectations for the remainder of the year. Markets now price less tightening from the BoE. Sterling weakened after the release, reflecting the reduced tightening path.
Across the Atlantic, the FOMC minutes from the July meeting offered no major surprises. Views on inflation diverged. Many participants said policy tightening would likely be necessary if inflation did not decline. Some noted that financial conditions might not be restrictive enough to return inflation to 2%. The discussion touched on artificial intelligence, with hawks pointing to upward demand pressures and doves citing longer-term productivity gains. Chair Warsh floated the idea of reducing meeting frequency to six per year from eight. No decisions were taken. Any change would not affect the 2026 schedule.
The US Treasury announced an increase in buyback volumes for longer-dated bonds. The yield curve flattened. The 10-year US Treasury yield fell to 4.64%, down 10 basis points from Tuesday's peak. The move in US yields only partly spilled into Europe, where primary market activity remained heavy with SSA and covered bond deals.
Euro area final inflation data confirmed the flash estimate of 2.9% year over year. Core inflation stood at 2.5%. Underlying measures were broadly unchanged, with only small increases. The data suggests price pressures remain sticky but have not risen significantly after the energy shock. The second-quarter labour cost index eased to 3.1% from 3.2% in the first quarter. Wage pressures continue to moderate, a disinflationary force. Economists expect only one further 25-basis-point rate hike from the European Central Bank.
Equities staged a modest rebound after several straight sessions of declines. The S&P 500 closed up 0.2% but near session lows. The Stoxx 600 slipped 0.1%. Health care led the S&P 500, up 3.5% in a single session. Moderna jumped 180% and Merck surged 12% on positive Phase 3 trial results for their mRNA cancer vaccine. Defensives fared well, including consumer staples and real estate. Tech was the main drag. The sector was mixed. Software moved higher while semiconductors sold off 2% alongside regional banks. US futures edged higher this morning.
In currencies, the dollar retreated. EUR/USD spiked after the Treasury buyback announcement. The euro also found support from the euro area data, which confirmed inflation and showed moderating wage growth. EUR/NOK continued to drift lower, as has been the case since early August, supported by higher energy prices. The Riksbank meets later Thursday. Markets expect the bank to hold its policy rate at 1.75%. The uncertainty centers on whether the bank shifts to a more hawkish tone in its communication. Economists expect two rate hikes from the Riksbank this year.
The forex market analysis section provides further detail on rate differentials and positioning.
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