Markets
An Israeli strike on Iran’s giant South Pars gas field set the “Iran-trade” back in swing after two days of contemplation. Iran immediately warned that (energy) facilities in Qatar, Saudi Arabia and the UAE are now on the its hit list as the attack on Iran’s own energy infrastructure “will not go unanswered”. Brent crude prices were already rising since the start of European trading, but the move hit a higher gear afterwards. The oil price rallies from levels just above $100/b to currently $110/b. Gas prices followed swiftly with the reference Dutch TTF contract add more than 10%, from €50/MWh to €56. In an attempt to stem (US) price pressures, US President Trump temporary waived the Jones Act allowing foreign-flagged vessels to transport a range of commodities between US ports for the next 60 days. Normally such cargo should be carried on US-flagged, -built and -owned ships. Core bonds turn back to sell-off mode, with yield curves bear flattening in anticipation of a hawkish (verbal) monetary policy response over the next 24 hours. The Fed, BoJ, ECB and BoE are expected to sound much more vigilant than their “transitory” rhetoric from four years ago. The Bank of Canada was a point in case today. They kept the policy rate unchanged at 2.25% but reported readiness to respond (to upside inflation risks) in the policy statement: “Governing council will look through the war’s immediate impact of inflation but if energy prices stay high, we will not let their effects broaden and become persistent”. Governor Macklem nevertheless downplayed the risk that higher energy prices quickly spread to the prices of other Canadian goods and services. He might have missed the BASF-memo. The German chemical group increases prices of some of its products by up to 30% effective immediate amid higher costs of raw materials, energy and transportation. Short-term German and UK yield increase by more than 8 bps. EMU money markets for the first time fully price 2 ECB rate hikes this year (25 bps). The front-end of the US curve grinds 4 bps higher. Adding to the inflation worries, February US PPI already beat consensus. Factory-gate prices increased by 0.7% M/M on a headline level and by 0.5% for core prices. Annual comparisons rose to 3.4% and 3.9% respectively. The latter matches the fastest pace since February 2023. Dollar gains in FX space are less outspoken than earlier this month. The trade-weighted greenback tries to regain the 100 barrier. EUR/USD changes hands at 1.1510 from a start near 1.1540. European stock markets switched intraday gains for losses of up to 0.50% with main US indices currently sliding by the same magnitude.
At tonight’s FOMC meeting, it is very unlikely that the policy statement, the quarterly projections or Fed Chair Powell’s press conference will still pave the way for a rate cut this year. At the end of February, US money markets discounted 2.5 rate cuts by December with the policy rate bottoming out around 2.75%-3% next year. Now, Fed funds futures only give an 80% probability to one Fed rate cut this year which would most likely be the final one than this cycle but might be pushed further in time. That leaves more room for repositioning in bear flattening fashion especially as we don’t exclude inflation hawks to put rate hikes in their forecasts.
News & Views
The Swiss KOF Economic Institute in its Spring forecast considers two scenarios as the exercise is overshadowed by higher trade-related and geopolitical uncertainty. In its baseline forecast, KOF assumes the impact on Switzerland from the conflict in the Middle East to be limited and to normalize after an initial shock. In this scenario GDP growth (ex-major sporting events) is projected at 1% this year and 1.7% next year. In an alternative scenario with the oil price holding near $90/b and remaining 30% above the baseline scenario, KOF downgrades its growth forecast to 0.7% and 1.5% respectively resulting in a cumulative GDP loss of 0.6% by end 2027. Employment growth would then weaken (20,000 fewer jobs) lifting the unemployment rate to 3.1% in 2027. Inflation in the risk scenario is expected to increase from 0.3% to 0.6% in 2026 and from 0.6% to 0.8% in 2027. Overall inflationary pressures remain low overall. Rents and domestic services remain the main drivers. Domestic goods and imports exert downward pressure with the appreciation of the franc adding disinflationary pressure. KOF expects the Swiss National Bank (SNB) to keep its policy rate at 0% throughout the forecast period. The SNB will release a regular policy decision tomorrow. The market will keep a close look at the SNB communication on FX interventions. The Swiss franc at EUR/CHF 0.907 trades slightly weaker from record strong levels (except 2015 spike) below EUR/CHF 0.90 last week.
 facilities in Qatar, Saudi Arabia and the UAE are now on the its hit list as the attack on Iran’s own energy infrastructure “will not go unanswered”. Brent crude prices were already rising since the start of European trading, but the move hit a higher gear afterwards.){kind=link}