Food Inflation Likely to Remain Elevated in the Long Term — Market Talk

0834 ET - Food inflation will be higher for longer as a result of climate-related supply shocks, lower investment and other factors, UBS analysts write. High welfare standards for livestock, as well as higher labor costs and fast-growing demand will also lift prices. Advances in agricultural technology might reduce costs and improve farm profitability, but would only modestly ease food prices. If food inflation persists, a greater proportion of customer wallets will go toward supermarkets, the analysts say. Such a development means food retailers might benefit from higher food prices, the analysts say. However, consumers might in turn spend less on eating out and on other discretionary, non-food consumer goods. ([email protected])0810 ET - Bitcoin and ether fall even as risk sentiment improves after President Trump said he called off an attack against Iran and said talks would begin Monday. "Cryptocurrencies have been left out of the general excitement, and now look at risk of tipping over into a fresh deep correction," IG analyst Chris Beauchamp says in a note. Cryptocurrencies stand or fall on momentum and sellers appear to be getting the upper hand, he says. Bitcoin falls 1.2% to $62,687, LSEG data show. Ether drops 2.1% to $1,842. ([email protected])0809 ET - Investors lower their expectations of the Bank of England increasing interest rates in the coming months as oil prices fall due to easing tensions in the Middle East. The U.S. announced plans to hold talks with Iran on Monday, raising prospects of a potential resolution to the Middle East conflict and the possible reopening of the Strait of Hormuz. Markets currently price in a total of 26 basis points of BOE rate rises in 2026, down from 30 basis points priced in last week, LSEG data show. ([email protected])0805 ET - Bahrain is likely to receive additional financial support from Gulf neighbors if the renewed closure of the Strait of Hormuz persists, Capital Economics says. The consultancy says Bahrain's foreign-exchange reserves fell to just over $2 billion in June from $6 billion in March, leaving policymakers with limited room to defend the dollar peg or support the balance of payments. While a prolonged Hormuz closure would raise the risk of devaluation and sovereign default, Saudi Arabia or the UAE would probably step in to prevent broader concerns over Gulf dollar pegs, the consultancy says. ([email protected])0802 ET - The threat of further joint U.S.-Japan currency interventions and the prospect of the Bank of Japan raising interest rates at a faster pace could discourage speculators from betting on a weaker yen, MUFG Bank's Lee Hardman says in a note. Treasury Secretary Scott Bessent showed willingness for further interventions with Japan after taking joint action to support the yen last week. Support from the U.S. means interventions will be viewed as more credible, Hardman says. Meanwhile, BOJ Governor Kazuo Ueda's comments at Friday's meeting suggest another rate rise is possible as soon as September, he says. The dollar falls 0.6% to 156.69 yen after reaching a three-month low 155.21 overnight, LSEG data show.([email protected])0729 ET - Saudi Arabia's economy is becoming more dependent on government spending as the Iran war weakens private-sector momentum, EFG Hermes says. Public consumption rose 11% and public investment surged 52% in real terms in the first quarter, while non-oil private investment contracted 1.4% and overall fixed investment fell 7.6%. The investment bank forecasts the economy will contract by 1% in 2026, with oil GDP shrinking around 11% and non-oil growth slowing to 2%, as conflict-related uncertainty weighs on investment, hiring and exports. ([email protected])0722 ET - Saudi Arabia's temporary oil windfall is unlikely to eliminate mounting fiscal pressures, increasing the need for another round of spending reprioritization, EFG Hermes says. The investment bank forecasts government expenditure will reach SAR1.5 trillion ($400 billion) in 2026, about 14% above budget, while the fiscal deficit narrows only marginally to 5.6% of GDP, versus the government's 2.3% target. The Iran war has raised spending requirements in areas including food security and critical infrastructure and could also make the foreign private capital needed to fund investment harder to attract, the firm says. ([email protected])0701 ET - Yields on U.K. two-year government bonds fall after oil prices drop, easing concerns about inflation. The U.S. announced fresh talks with Iran, raising hopes about a possible resolution to the Middle East conflict and calming inflation fears. Brent crude price is down 5.0% to $83.5 a barrel. Two-year gilt yields fall 8.6 basis points to 4.310%, the lowest level since July 17, Tradeweb data show. ([email protected])0658 ET - Final manufacturing PMIs for the eurozone for July were somewhat disappointing, Tomas Dvorak at Oxford Economics says in a note. The PMI was revised down slightly to 51.9, dragged by underwhelming readings in both Italy and Spain. Still, price pressure in both countries appeared to soften, Dvorak says. "This is consistent with our view of limited second round effects from the ongoing commodity shock that should keep the rise in core inflation moderate over the coming months," he says. However, this is unlikely to alter the European Central Bank's caution given continuing hostilities between the U.S. and Iran and the rebound in global energy prices. "We will put another 25bp rate hike back into our baseline for our August forecast update," Dvorak says. ([email protected])0616 ET - Credit spreads, or the risk premium on corporate bonds, could widen over the coming months as financial conditions tighten, RBC BlueBay Asset Management's Mark Dowding says in a note. Markets are pricing in the risk of central banks increasing interest rates to tackle inflation, which could lead to a decline in available cash for investments, Dowding says. Lower liquidity combined with increased credit supply could result in "wider spreads and weaker credits becoming crowded out of the market altogether", he says. ([email protected])0615 ET - U.S. Treasury yields are expected to rise further with interest-rate hikes by the Federal Reserve coming later, BNP Paribas analysts say in a note. "We think the market will continue to question the Fed's credibility and push long-end yields higher," the analysts say. The Fed left policy rates unchanged last week, with three FOMC members dissenting in favor of a hike. BNP Paribas analysts continue to expect the Fed to deliver three hikes starting December. "All in all, we believe the FOMC is moving towards rate hikes, albeit with a reluctance similar to its hesitation in April to abandon its easing bias," the analysts say. ([email protected])0544 ET - While production and new orders rose in July, U.K. manufacturers are starting to feel the strain of higher energy prices, Matt Swannell at the ITEM Club says in a note. The manufacturing PMI fell to 51.9 in the month, from 52.5 in June. "We think the breakdown of the U.S.-Iran ceasefire early in the month and the uncertainty surrounding the future of the conflict has been a key drag on manufacturers' optimism," he says. Higher energy costs will likely weigh on the sector in the second half, despite output price inflation easing to a four-month low in July. "Just as with the wider economy, we anticipate that this relief will be temporary," he says. ([email protected])