European Markets Consolidate After US CPI Data

Top headlines:

Market snapshot:

• Crude oil (WTI) gained 0.04%, reaching $95.08.

• Gold rose 1.22% to $4,154.

• The euro outperformed while the Australian dollar underperformed.

• The S&P 500 fell 0.31% to 7,746.

• The US 10-year Treasury yield declined 11 basis points to 5.08%.

• Bitcoin decreased 0.86% to $80,856.

The session remained fairly subdued, lacking any significant news or economic data. The main data release was the UK monthly GDP figure, which surpassed forecasts on all counts. However, the report had little impact as it only confirmed the market's existing expectation of a Bank of England rate increase in November, a move that had already been discounted.

Bank of England officials also spoke: Greene reiterated her advocacy for rate hikes to prevent second-round effects, while Breeden highlighted weak labor market conditions as a reason for a more cautious stance given the absence of clear second-round effects. European Central Bank policymakers similarly cited the lack of second-round effects as justification for a less aggressive tightening path.

In commodities, crude oil continued its gradual rise as there was no improvement in Middle Eastern tensions. The conflict between Saudi Arabia and the Houthis has escalated, with the Houthis striking multiple Saudi sites, such as Riyadh's international airport and the Aramco headquarters in Dhahran. The group has vowed to target more airports and energy facilities, while Saudi-led forces remain engaged in combat with the Houthis within Yemen.

Shipping in the Strait of Hormuz remains disrupted. Two ships were recently sunk after being struck by Iranian forces. Iran's leaders stated that they will persist in fighting until the United States meets their conditions.

In a final note, Reuters cited a CNN report stating that the US military has drawn up contingency plans that may involve deploying the MOAB bomb—the largest non-nuclear weapon—against Iranian energy or nuclear facilities should President Trump order a resumption of combat operations. Reuters noted that it was unable to verify the report independently and emphasized that these are merely contingency plans, not a confirmation of use.

A majority of other markets were in consolidation mode following the previous day's US CPI shock. The core inflation figure came in above expectations, sparking a selloff in riskier assets. However, only slight adjustments occurred in rate hike expectations, along with a dovish repricing at the longer end of the curve, indicating that the market may be growing more anxious about economic growth.

Notably, equities, copper, cryptocurrencies, the US dollar, and bond yields were all lower on the day, while gold recovered all of its earlier declines. This pattern resembles a stagflationary scenario, in which risk assets and the dollar tend to lag, and gold takes the lead.

Upcoming catalysts include the Flash PMI figures, the Federal Open Market Committee meeting, US-Iran talks, and the US midterm elections. Should economic indicators begin to signal worsening conditions, the market's growth concerns could intensify. A potential game changer would be a resolution to the US-Iran conflict, which would instantly boost the growth outlook.