Middle East Tensions Fail to Spark Market Panic as Interest Rates Continue to Rise

The global economy has been shaken by recent events in the Middle East and the fallout from the Federal Reserve's policy update. Despite ongoing military action between the US and Iran, oil prices have remained contained, with Brent crude trading below $90 per barrel.

US GDP growth slowed to an annualised 1.5% in Q2, missing expectations of 2%. However, private consumption rose by a stronger-than-expected 3.2%, while fixed investment increased 7.0%. The core PCE deflator for June rose just 0.1%, with the annual increase nudging down to 3.3%.

The market reaction to the economic data was muted, overshadowed by continued digestion of Fed Chair Warsh's press conference following yesterday's FOMC policy update. The sharp curve steepening that followed has continued for another day, albeit with rates lower across most of the curve. The 2-year Treasury yield is down 5bps to 4.23%, while the 30-year rate is up 1bp to 5.21%, reaching fresh highs not seen since 2007.

The Bank of England kept rates steady at 3.75% in a 6-3 vote, with Governor Bailey stating that 'there's nothing' to suggest the bank is edging towards a hike. The dovish policy update drove rates lower, led by the short end.