Markets
The Brent crude price shows no sings of cooling off today with the $100/b mark nearby. Hostile comments from both sides suggest no near-term end to the Middle East conflict with Iran’s Khamenei for example warning of potentially opening new fronts. The Internation Energy Agency said that the war is causing the largest supply disruption in the history of the global oil market. Only yesterday, its member agreed to release 400mn barrels from emergency reserves, but that failed to calm down prices. On the contrary. As the conflict drags on, interest rate money markets continue erring on the side of a different reaction function from central banks. In the case of Europe, they look towards interest rate hikes with German/EMU yields adding a few bps today. The German 10-yr yield today reached its highest level since October 2023 with underlying inflation dynamics doing the same. At 2.3% for Germany, they move further away from the “anchored” position they’ve been in over the past two years near the ECB’s 2% target. UK Gilts extend their underperformance. There, the bear flattening already turns into a bear steepening with yields adding 6 bps (2-yr) to 9 bps (30-yr) today. UK money markets switched from discounting a cumulative 50 bps of rate cuts by the end of this year at the end of February to currently attaching a 50% probability to a rate hike before year-end. The UK 2-yr yield surpasses the 4% mark with the UK 10-yr yield (4.76%) gradually closing in on a test of the 2024 high at 4.92%. Overall risk sentiment takes a new significant setback with main European and US indices losing around 1.5%. In FX space, dollar remains king with the trade-weighted greenback testing the YtD highs at 99.68 and EUR/USD testing the YtD lows just north of 1.15. Both are risk of a (USD) break higher. US eco data included January trade numbers. Based on strong export numbers (+5.5% M/M), our in-house KBC Nowcast for Q1 GDP jumps to 4% Q/Qa, but no strong conclusions should be drawn at this stage as the volatility in the data remains significant. We keep a close eye at the US Treasury’s 30-yr Bond auction tonight following weak 3-yr Note and 10-yr Note sales earlier this week.
News & Views
The German Kiel IFW Institute and the Ifo institute today published its Spring eco forecasts for Germany. The forecast of the Kiel Institute has a working assumption that commodity prices, consistent with market expectations, will stay significantly elevated only for a short period and then start to ease again. The Institute then sees a 0.6% of GDP loss of purchasing power this year. The Kiel Institute reduces its 2026 GDP growth forecast for Germany to 0.8% (from 1% Winter forecast). 2027 growth is still seen reaccelerating to 1.4%. Due to the rise in energy prices, inflation is forecast at 2.5% this year (from 1.8%) to still hold at 2.1% next year. The institute sees moderate export growth (0.3%) but this still causes Germany to lose global market share. It takes a guarded approach on the structural growth potential of the economy. “Without the stimulus measures bought with high budget deficits, the momentum would be so moderate that it does not qualify for a self-sustaining recovery.”. The public deficit is projected to rise from 2.7% of GDP in 2025, to 3.7% this year and 4.2% in 2027. Ifo works with two scenarios. In a de-escalation scenario, GDP growth is seen at 0.8% this year and 1.2% next year. Without the energy price shock, IFO would have set a slight upward revision (to 1%), as the fiscal measures in the defense sector are having a faster impact. Inflation is expected to peak just below 2.5%. In the escalation scenario, the growth burden will increase to 0.8 ppt negative this year and next year compared to the pre-war scenario. Inflation then remains higher for longer and peaks at just under 3%. This is not only due to energy prices, but also as higher production costs will be passed on to the prices of other goods and services. The ECB is than expected to respond by raising the policy interest rate by a total of 50 basis points in H2. With GDP growth of just 0.6% and 0.8% this year and next year, the recovery will continue.
Indian inflation accelerated from 2.74% Y/Y in January to 3.02% in February. Food prices in the same context rose from 2.13% Y/Y to 3.46%. The rise in inflation was slightly more than expected. Even so inflation currently holds well with the 4% +/-2% inflation target range of the Reserve Bank India (RBI) RBI over last year reduced the policy rate from 6.5% to currently 5.25%. It left the policy rate unchanged at the February meeting. As the case for most other countries, the rise in energy prices also here poses upside inflation risks, with the rupee trading at all-time lows against the dollar, adding to those risks. USD/INR currently trades near 92.2. According to Bloomberg reporting, referring to people familiar with the matter the RBI today conduced FX swaps support the rupee.
