Good morning. The dollar is holding firm as oil prices climb and traders batten the hatches ahead of this morning’s US inflation update. Brent, the global benchmark, is trading above $105 a barrel after Iran struck two vessels in the Strait of Hormuz and Yemen’s Houthis targeted several facilities including Saudi Aramco’s headquarters, reinforcing fears of prolonged supply disruptions. Ten-year Treasury yields are holding just below 5.2%, down from 5.35% last week, and broad equity indices are pointing to modest gains at the open even as semiconductor stocks remain under pressure.
Long-term yields are easing off their highs as Federal Reserve officials deliver more nuanced messages than those seen in early September. In appearances yesterday, governor Christopher Waller warned that artificial intelligence-led price pressures could intensify before productivity gains begin to emerge, and Chicago’s Austan Goolsbee said this risked broadening into more persistent inflation. New York’s John Williams, however, said that while the central bank may need to raise rates once more this year, disinflationary forces should strengthen in 2027, negating the need for further hikes. “My view is this is not an economy that is overheating overall,” he said. “This is not an economy where it’s adding inflationary pressures beyond these particular shocks that we’re experiencing”.
Rate differentials could further narrow against the dollar over the coming hours if today’s consumer price report meets expectations. Investors are well-prepared for an acceleration in headline inflation after September’s jump in oil prices, but have thus far seen little evidence of a spreading in price pressures beyond categories driven by the war with Iran and the artificial intelligence buildout. Barring an upside surprise in measures of underlying inflation, markets could pare back the three rate hikes they now expect by June.
The euro is holding steady after Christine Lagarde said France should put its own fiscal house in order, downplaying the prospect of a rescue from the European Central Bank. French government bond yields have risen by the most among the major advanced economies on concerns that the country’s fractious political leadership is unwilling to tackle spiralling debt ahead of next year’s presidential election—raising fears of an eventual, currency-diluting intervention by the central bank. We suspect it won’t come to that, but think elevated natural gas prices pose a greater threat to the common currency in the near term, with inventories currently well below seasonal norms.
Two-sided exchange rate risks will persist well beyond this morning’s inflation update. Markets will watch this afternoon’s Beige Book survey and tomorrow’s retail-sales report for insight into the strength of underlying US consumer demand, and the dollar could shift direction on any surprises. Investors will also scrutinise tomorrow’s British gross domestic product figures to see how the economy is coping with rising energy costs and tighter monetary policy, with the outcome influencing market pricing for further rate hikes from the Bank of England.