It’s “the Fog of Uncertainty” in Full Swing

Markets

“The fog of uncertainty cannot be an excuse for inaction.” The quote is from Bank of England’s chief economist Huw Pill but could have come from any monetary policymaker serious about preserving credibility central banks had to restore following the 2020-2022 inflation spike. Pill is worried about the current energy shock’s effect beyond the immediate, short-term impact. He fears for the second-round effects through price and wage setting which could materialize much faster than in the past. Having February inflation this morning coming beyond expectations between 3% and 4.3% depending on the gauge will only strengthen his view. Pill’s comments underscore the central bank’s officially stated “readiness to act”. They came after yesterday’s UK March PMIs, which similar to the European ones, already screamed stagflation after being just two weeks into the Middle East conflict. It served as a stark reminder to core bond markets. Bunds underperformed with yields soaring up to 10 bps at the front. Swap yields even rallied 14 bps with the 2-yr reading for 3%. Yields rose between 1 and 3.8 bps in the US and 2.3-5.1 bps in the UK. The US dollar eked out some small gains against most peers, pushing DXY higher to 99.43. EUR/USD stabilized around the 1.16 big figure. EUR/GBP did the same near 0.865. Stocks were torn between conflicting messages coming from president Trump who hailed productive talks with Iran but Iran denying those having happened at all. It’s “the fog of uncertainty” in full swing, including today. The US reportedly ramped up diplomatic efforts by drafting a 15-point plan intended to bring the war to a close. The details are unclear but it is highly unlikely that an emboldened Iran will simply accept the US-set terms. The plan would also call for a one-month ceasefire to allow for negotiations. Markets are currently cheering diplomacy with (Asian) stocks and (European, US) futures markets rising, oil dropping and core bonds stabilizing from the rout yesterday. Looking at the actual developments rather than things being said, we remain cautious. The US is deploying thousands of more troops to the Middle East and Israeli and Iranian missiles continue to pierce the skies. Meanwhile the new deadline to open the Strait of Hormuz is approaching this Friday. 2026 weekends have been critical for any major Trump administration moves.

News & Views

Inflation in Australia eased slightly in February. Headline CPI was flat from January and softened to 3.7% Y/Y from 3.8% Y/Y. Trimmed mean core inflation rose 0.2% M/M to hold unchanged at 3.3% Y/Y. The largest contributors to annual inflation were housing (+7.2%), food and non-alcoholic beverages (+3.1%) and recreation and culture (+4.1%). Transport prices fell 0.2%, with automotive fuel prices declining 7.2% Y/Y (due to monthly declines of 3.4% and 3.2% in February and January respectively). However, this mitigating effect will be sharply reversed in the coming months due to higher prices related to the conflict in the Middle East. Inflation is expected to rise further away from the 2-3 % RBA inflation target. Even as the 2-y yield eased 10 bps (4.63%), the market still sees of chance of 70% of a next follow-up RBA rate increase at the early May meeting. The Aussie dollar over the previous days lost some momentum and this morning eases below the AUD/USD 0.70 barrier (currently 0.697).

The National Bank of Hungary (MNB) yesterday left its policy rate unchanged at 6.25%. The bank raised the inflation forecast for 2026 (3.8% from 3.2%) and 2027 (3.7% from 3.3%) with inflation still expected to return to 3% in 2028. The outlook for growth was downwardly revised from this year (1.7% from 2.4%) and for 2027 (3% from 3.1%) but upwardly revised from 2028 (2.9%). MNB sees household consumption as the main driver for growth in due to rising real wages and the government’s income-increasing measures. Capacity-increasing investment projects of recent years still are expected to help the expansion of industrial exports. In February 2026, inflation and core inflation declined to 1.4% and 2.1%, respectively due to favourable repricings. Prices caps have a mitigating impact on inflation in the coming months, but CPI is expected to return above the tolerance band (3% +/- 1%pt) band in Q3. In the current economic environment, maintaining the stability of domestic financial markets, especially that of the foreign exchange market, is seen as crucial for anchoring inflation expectations and thus achieving price stability. Maintaining tight monetary conditions is warranted. With the 2-y swap yield at 7.44%, the market currently prices the risk that MNB at some point might be forced to tightening policy to secure financial stability. EUR/HUF in volatile trading over recent days hovered near the 390 mark. Governor Varga said MNB has the right to intervene in FX if necessary.