The Daily Brief

Tuesday's labour figures did what almost nobody expected: unemployment fell to 4.7% in the three months to August, from 4.9%, when forecasts had braced for a rise towards 5%. Regular pay growth firmed to 3.7%, above expectations, and although total pay including bonuses slowed to its weakest pace in nearly six years, it is regular pay the MPC watches for signs that energy costs are feeding into wages. Sterling responded in yesterday's session by climbing towards 1.34 against the dollar and pressing lower against the euro, with EUR/GBP slipping below 0.84 from around 0.843 at the end of last week.

A gain against both the dollar and the euro is the signature of a domestic repricing rather than a softer dollar doing the work. The data removed the strongest argument the MPC had for patience. A labour market visibly loosening would have given the Bank cover to wait on November, given the limited evidence so far of energy pass-through into broader prices. Instead, vacancies are still falling but pay is holding, which strengthens the hand of members worried about second-round effects. Markets now price roughly 95% odds of a 25 basis point increase to 4% on 5 November, with a further move priced by February.

When a decision is that fully priced, sterling has little left to gain from the decision itself; what remains live is the path beyond it. That is why this morning's CPI matters more for the second hike than for the first. Headline inflation is expected to rise to 3.4% from 3.1%, with core at 2.7% to 2.8%, which would make September the highest reading of the year. An in-line print confirms November without adding much. An upside surprise, particularly in services, would pull February pricing forward and widen sterling's yield advantage.

A soft print would not derail November, but it would start the market thinking about a single hike rather than a cycle, and that is the scenario in which sterling gives back Tuesday's gains. With 10-year gilt yields already near 5.4%, the market is priced for the hawkish outcome, which leaves more room for a downside surprise to move it. Positioning adds a twist into next week's Budget on 28 October. Speculative accounts have built short sterling positions through October, and the weeks before a Budget have typically seen investors lighten up on the pound.

This year the stronger labour data and a central bank on the verge of tightening are cutting against that pattern, and a market that is short into good news tends to cover quickly. That cushions the downside, but it also means part of Tuesday's rally was short covering that will not repeat. At around 1.337, sterling sits just beneath the 1.339 to 1.340 zone where its 100-day average and the quarter-end model reference near 1.34 converge, and well above the 1.3285 to 1.3300 band that capped it for most of October. That zone is today's test: a firm CPI print gives the pair the catalyst to clear 1.34, while a soft one would bring 1.33 back into view as the nearer reference.

With November all but fully priced, the balance of risk tilts modestly lower over the next few sessions, because the data now has more room to disappoint the hawkish case than to extend it.

The two-year Treasury yield rose by two basis points on Tuesday while the 10-year fell by three, leaving them at around 4.79% and 5.12% and the gap between them at roughly 33 basis points. That spread captures the dollar's position this morning. The front end is still pricing a Fed that tightens again, with roughly a 94% chance of a December hike, while the long end is pricing a weaker economy. The dollar index sits near 101.8 after touching a three-week low around 101.5 yesterday, and the flattening curve explains why it has lost momentum without losing its rate support.

The weakness the long end is pricing is clearest in housing. Housing starts fell 5.2% in September and pending home sales dropped to a record low, evidence that mortgage rates near multi-decade highs are already doing some of the Fed's work in the most rate-sensitive corner of the economy. That is what pulled long yields lower, and it limits how far the dollar can trade on the hike story alone. With hold odds for next week's meeting around 83%, October is not the event; December is, and the data between now and then will be read through the housing lens as much as the inflation one.

Oil is the counterweight, and it reasserted itself overnight. The dollar steadied as Brent climbed back towards $110 after a diplomat disputed reports that a US-Iran agreement was close. Higher energy prices lift US inflation expectations and protect December hike pricing, which is why the dollar has tended to firm on oil spikes this month rather than weaken with risk appetite. Each diplomatic headline therefore reaches the dollar through two channels at once, inflation expectations and safe-haven demand, and for now both point the same way.

Equities are rotating rather than retreating. The Dow gained 1% to a one-month high on Tuesday as buying spread into health care, industrials and smaller companies, while the Nasdaq was flat on renewed doubts over how AI infrastructure is being financed. Netflix fell after hours on a weaker fourth-quarter outlook, and Meta and Tesla report tonight. A disappointing capital spending story from the megacaps would test risk appetite and, through demand for Treasuries, pull long yields lower again, flattening the curve further and leaving the dollar more dependent on oil for support.

At 101.8, the index sits roughly midway between Tuesday's three-week low near 101.5 and the 18-month high near 102.9 set on 14 October, and about 0.3% above the quarter-end model reference near 101.5. With an October hold and a December hike both largely priced, the policy channel has little left to give in either direction before next week's meeting, and the asymmetry rests on oil. A confirmed diplomatic breakthrough would strip out the dollar's energy-inflation support and put 101.5 under pressure; a further breakdown in talks would bring a retest of 102.9 back into play. Absent either, the index leans towards range trade, with the risk modestly skewed higher while tanker attacks continue.

The rand went into today's twin events at its strongest level since late September, trading around 16.40 against the dollar in Tuesday's session, and local bonds told the same story, with the 10-year yield holding near 8.89%, around a one-month low. Since the 14 October test of 16.65, the currency has gained roughly 1.5% with little help from the external backdrop beyond a softer dollar. That is a market that has positioned for a credible medium-term budget rather than one hedging against a poor one, and positioning of that kind changes how the day is likely to trade.

The case the market has bought is a strong one. Estimates of the revenue overrun have settled around R50bn or more, broadening from mining taxes on elevated gold and platinum prices into personal income tax and VAT. On those numbers the deficit could narrow to about 3.5% of GDP this year from February's 4%, with the primary surplus rising towards 1.9%. Moody's and S&P both carry positive outlooks, with reviews due in late November, so a disciplined statement this afternoon would make an upgrade path tangible and give investors a reason to keep compressing South Africa's risk premium.

The pressures pulling the other way are just as visible. Fuel prices are at record highs, growth forecasts have been cut to around 1%, local government elections fall on 4 November, and the calls for Treasury to use part of the windfall on fuel relief have grown louder this week. The morning's inflation print, forecast at about 4.6% from 4.4%, will sharpen that tension four hours before the minister speaks: a hotter number strengthens the case for relief while also reinforcing a SARB that has already said headline inflation is likely to exceed 5% later this year. A Treasury that banks most of the windfall and carries only part of it into future projections would satisfy the bond market; one that spends it would not.

At around 16.40, the rand sits about 0.3% from the quarter-end model reference near 16.35 and roughly 1.5% stronger than the 16.65 high of 14 October, so most of the distance a good outcome would justify has already been travelled. The balance of risk therefore leans towards weakness: a statement that merely meets expectations may leave the rand little changed, slippage in the debt path or a large relief package could send it back towards 16.60 quickly, and a sustained break below 16.35 would need both a narrower deficit and a visible commitment to bank the windfall rather than spend it.

The market's working assumption on the Gulf has shifted this week, from a supply shock measured in missing barrels to a diplomatic question with a largely binary answer. Middle East energy exports are now estimated at around 80% of pre-war levels, although refined product supply remains tight, and attention has moved to whether Washington and Tehran can close a deal. Tuesday showed what that shift means for price: an unconfirmed report of a Qatari and Pakistani compromise proposal, including about $6bn of frozen Iranian funds, knocked Brent as much as 3.3% from a five-month high near $112, before a diplomat involved said a deal was not close and prices recovered.

Brent is back near $110 this morning, and the reasons it holds there are physical. At least 18 vessels have come under attack in the Strait of Hormuz over the past two weeks, US crude inventories fell by around 4.9 million barrels last week on industry data, a third straight weekly draw if this afternoon's official figures confirm it, and heating oil is pushing towards record levels as the shortage of refined products bites. The floor under oil is set by tankers and inventories; the ceiling is set by diplomacy, and the two can move independently of each other.

The political calendar is what makes the ceiling fragile. Traders are wary that the White House may push to dial down the conflict before the US midterm elections in early November, and Iran has said its offer to reopen the strait within seven days remains on the table, even as its foreign ministry calls the US response insufficient. The April precedent is instructive: when a two-week ceasefire was agreed then, Brent fell almost 16% in a single session to around $92. A market that has watched that happen once prices the possibility of a repeat into every headline.

Elsewhere, the reaction in other assets says oil is being traded as an inflation story rather than a safe-haven one. Gold slipped for a fourth session to around $4,120 even as crude rose, held back by Treasury yields that remain elevated, while the Nikkei rallied more than 1% on renewed AI optimism. For currencies, that means oil reaches sterling, the rand and the euro chiefly through the inflation path their central banks are already trying to manage, which is why each move in Brent now shifts rate expectations as much as risk appetite.

At around $110, Brent sits at the upper end of Tuesday's swing between roughly $108 and $112 and about 20% above the $92 it touched on the April ceasefire. The distribution is lopsided in an unusual way. Day to day, the drift is higher while tankers are struck and inventories draw, but the single largest move on the table is downward: a confirmed agreement that could take $10 or more off the price in a session. For energy-exposed balance sheets, the current level is less a forecast than a midpoint between two very different outcomes.