PMI data, ECB decision test markets as oil tops $80 on conflict

Traders brace for a data-packed week as July PMI readings and an ECB decision collide with renewed Middle East conflict pushing oil above $80.

Provisional purchasing managers' surveys for the US, eurozone and the UK will provide the first snapshot of July business activity this week, just as the resumption of Middle East conflict pushed Brent crude above $80 a barrel and clouded the inflation outlook for major central banks.

"Last month's PMI didn't fully incorporate the reopening of the Strait, but this month's will likely have already missed the most optimistic take on things," said Bert Colijn, senior eurozone economist at ING. "With the conflict flaring up again, immediate hopes of a swift reopening are thrown into uncertainty."

The European Central Bank delivers its rate decision Thursday with markets pricing less than a 10 percent chance of a hike, according to ING. The ECB held its deposit rate at 3.75 percent in June after cutting by 25 basis points from a record high of 4 percent, and officials have signaled patience. Eurozone inflation came in better than expected in June, giving the bank room to wait, though energy prices — particularly gas — are dragging the outlook closer to the ECB's June forecasts, which envisaged core inflation above target for the foreseeable future even with one further rate hike.

The US data calendar is lighter, with home sales the most notable release alongside the PMI figures. The Federal Reserve enters its quiet period ahead of the July 29 FOMC meeting, where market pricing suggests just a 10 percent chance of a hike — down sharply from coin-toss odds before benign June CPI and PPI prints. Core CPI was flat on the month for the first time since 2021, and Fed officials have signaled they need several months of better data before considering policy easing. The Fed's preferred PCE inflation gauge, due July 30, could come in slightly hotter than CPI due to measurement differences in air fares, medical care and portfolio management fees.

In the UK, the Bank of England meets July 30 with a rate hike seen as unlikely. Lower petrol prices should help headline CPI edge lower when June data is released Wednesday, while services inflation is also set to fall. Private sector wage growth has already dipped below the 3.25 percent level the Bank says is consistent with its 2 percent inflation target over the longer term. ING's James Smith expects the vote to remain 7-2 to hold rates, matching June's split.

What the Data Means for Policy

The PMI readings carry extra weight this month because they capture the first full survey period since Middle East hostilities resumed. A downside surprise in the eurozone would strengthen the case for the ECB to hold through September, while a resilient US reading could reinforce the Fed's wait-and-see stance despite the recent disinflation progress. Oil above $80 complicates the picture for all three central banks, as higher energy costs risk feeding through to headline inflation just as policymakers were beginning to declare victory over price pressures.

The last time oil traded sustainably above $80 during a period of Middle East conflict, in late 2023, core inflation in the eurozone took an additional three months to decline by 0.3 percentage points, according to Eurostat data. For the Fed, the 2022 oil spike following the Russia-Ukraine invasion added roughly 1.5 percentage points to headline CPI within four months, though the pass-through to core measures was more muted.

This article is for informational purposes only and does not constitute investment advice.