Markets
Yesterday’s price moves on almost all markets were again highly correlated to the intraday swings in oil prices. Brent oil in Asian trading almost touched the $120 p/b level as the there was no indication after the weekend that the conflict in the Middle East would end anytime soon. Iran approving Mojtaba Khamenei as new leader at least suggested that the country didn’t intend to prepare for the regime change the US was hoping for. The sharp rise in oil prices in a first reaction intensified a broad stagflation trade/risk-off trade. Short-term yields jumped sharply higher. EMU 2-y swap at some point early in the session jumped about 20 bps higher. The UK 2-y gilt yield even jumped close to 30 bps intraday. A sharp reappraisal also occurred on smaller markets with currencies being highly sensitive to global risk sentiment (Hungary). European equities initially tumbled sharply (Europe -2%+). The dollar remained the primus inter pares. Throughout session, oil price gradually eased and this also removed some pressure from the above-mentioned risk-off stagflation trade. Markets maybe took some comfort from the G7 pondering options to use strategic oil reserves to try to manage the jump in oil prices. Sentiment improved further in US dealings. US president Trump later suggested that the war might end soon but wasn’t concrete on an exact timing. He also suggested waivers on oil sanctions and US action/escorts to keep passage at the Strait of Hormuz. Even as the President’s guidance was far from specific, markets drew some further comfort, reversing part of the early session ‘panic trade’. Oil closed below $100 p/b and this morning even is seen near $94. US yields at the end of the day even eased 2-3 bps across the curve. German yields, despite wild intraday swings closed with day changes of less than 1 bp. US equity indices even finished in green (S&P 500 +0.83%). The intraday setback of the oil price also eased the bid for the dollar. DXY closed off the intraday highs (99.17). EUR/USD again avoided a close below 1.16.
Asian markets this morning also show relief in the wake of President Trump’s comments overnight. The Nikkei gains 2.9% with almost all other regional markets in green. The dollar mostly holds the overnight setback (DXY 98.75, EUR/USD 1.163). Later today, one can expect markets to still be pushed back and forth by headlines on the conflict in the Middle East. We look out whether some stabilization can kick in at the short end of the yield curves in the likes of EMU and the UK. EMU money markets are pondering the need for the ECB to address inflationary risks and discount about 50%-75% chance of a rate hike by summer. UK money markets fully priced out any further BoE easing. Interesting to hear the assessments of Powell, Lagarde and Bailey as they all hold policy meetings next week. On FX, we stay cautious to row against the USD-friendly stream also as visibility on the conflict in the Middle East remains as low as it is. EUR/USD 1.1507/1.1492 remains next reference on the technical charts.
News & Views
Inflation expectations ticked down at the short-term horizon, the NY Fed February survey showed yesterday. The one-year ahead gauge eased by 0.1 ppt to 3% while three- and five-year-ahead horizons held steady at 3%. Labor market expectations declined slightly overall with the one-year-ahead earnings growth expectations decreasing to 2.5%, just below the trailing twelve-month average. The expected quit rate (leaving a job voluntarily), in the next twelve months decreased to 15.9%, a new series low while the perceived probability of finding a job in the next three months if one’s current job was lost decreased to 44%. This contrasted with expectations of a higher unemployment rate one year from now falling by 2 ppts to 39.9% The perceived probability of missing a minimum debt payment over the next three months fell to the lowest level since February 2024, decreasing by 2.1 ppts to 11.6%.
The British Retail Consortium (BRC) reported a slowdown in the UK’s retail sales growth with the y/y printing at 1.1% in the four weeks ending February, down from 2.7% in January and below the 12-month average growth of 2.3%. Food sales rose 2.9% from 3.8% in January while non-food sales dropped compared to February of last year. The -0.4% y/y contrasted with a 1.7% bump the month before. Same store sales grew by 0.7%, the slowest pace since May of last year. Food sales rose by 2.3% while the non-food sector reported a 0.6% annual drop. “February’s grey, wet weather hit retail sales hard,” BRC Chief Executive Helen Dickinson said, adding that “Spending was weak across most categories, online and in-store, as households pulled back after Christmas and January’s rebound.” Retailers looking to spring and better weather to revive sales see that case undermined by the conflict in the Middle East.
