Strategy Daily

Evelyne Gomez-Liechti | Multi-Asset Strategist (Mizuho International Plc) |

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Focus remains on the US-Iran headlines and the US inflation data. Brent has stabilised at high levels, around the $88-88.5pb area, which has allowed rates markets to consolidate, although the duration bid does not look especially convincing. The key overnight development is that Iran continues to push back on Trump’s claim that the US has “total control” over Hormuz, with Tehran still linking a fuller reopening of the Strait to its demands being met. So for now, this still fits the “strategic patience” scenario we laid out yesterday. Negotiations are not really going anywhere, both sides think time is on their side, shipping disruptions remain, and markets keep swinging between “deal is close” and “talks are stuck”. The risk is that this may not be that clean benign/TACO setup anymore. The market has become very comfortable fading oil spikes and selling vol on escalation headlines, but Houthi involvement makes the tail risk more live. It turns the story into a two-chokepoint problem, where even if Hormuz headlines improve, the Red Sea and alternative shipping routes remain vulnerable. Our baseline is still not for a hard-line US response, but the risk of more extreme proxy escalation is high enough that rates markets should not fully ignore the oil beta. On the inflation side, CPI was in line and gave the front end some relief. Core was 0.2%MoM and headline was 0.1%MoM, so not enough to force a September hike back into the price, but also not soft enough to close the debate. Inflation remains in that uncomfortable range: too high for the Fed to relax, but low enough for the doves to keep delaying. PPI today is therefore the next test, alongside jobless claims and the 30Y auction. I would still be careful chasing rallies, especially in the back end, where supply, fiscal concerns and oil-related term premium remain hard to dismiss.

EGBs remain more driven by global duration and oil headlines than by domestic data. Yesterday’s session was another example: a small early bid, some support after the oil move, limited follow-through after in-line US CPI, and then late selling after the renewed Hormuz headlines. For EUR rates, the “strategic patience” baseline likely means that the ECB’s reaction function does not need to change much (still in the ECB’s “baseline” case of two hikes to 2.5%). Curve steepening remains the cleaner expression to us vs chasing outright duration. Bund supply was mixed yesterday, with the 12Y fine but the 27Y weaker, and that also argues against being too relaxed on the long end. Today’s calendar is light, with Spanish CPI and Eurozone industrial production unlikely to change the direction materially.

UK Q2 preliminary GDP was slightly above consensus, with growth slowing from 0.6%QoQ to 0.4%QoQ in Q2. The upside surprise came mostly from investment rather than a broader improvement in the data. Looking at June, manufacturing and industrial production missed, while services were a notch better than expected, although that was offset by downside revisions to May. The headline is a bit better, but the detail is not strong enough to change the domestic rates story. Immediate GBP FX reaction has been muted and, given the lack of a bigger surprise, this is probably not enough to shift the BoE’s resolve. The real test is next week, when we get inflation and labour market data. Until then, SONIA pricing should remain more sensitive to global oil/inflation headlines than today’s GDP print. Politically, the Clacton by-election is due today and will be one to watch as a read on how sentiment around the parties has evolved, although the market relevance is still more about what it might imply for fiscal expectations into the Autumn Budget.

Another mixed session in Asian equities. All eyes have been in Japan, where the government reportedly said they would support faster BoJ rate hikes before December. JGBs bear-steepened while USD/JPY spot continued to trade near 159.50. Multi-Asset Strategy Daily…