Consumer Confidence in the UK Collapsed

Markets

The ECB Watchers Conference distracted from the ongoing war in the Middle East yesterday. Key takeaways include that, while the 2026 macroeconomic backdrop is different from 2022, the ECB is on high alert for energy inflation to spill over and affect inflation expectations through wage price setting. The latter is likely to adjust much quicker because of the 2022 legacy. Any shock that is not short-lived and limited in size would require a monetary policy response, if only for the sake of communication and to underscore the central bank’s resolve to keep inflation at 2%. The market impact was limited and in any case distorted by reports of a 15-point US plan offered to Iran to end the war. A one-month ceasefire was included to allow for negotiations. After weeks of bombardments and aggressive rhetoric, the diplomatic outreach prompted some risk on in markets. Stocks rose, Brent oil lost the triple digit mark at some point and core bonds sighed of relief. European and UK bonds outperformed Treasuries. German rates eased between 6 and 7.1 bps in bull steepening. Gilt yields tanked 5.6 (2-yr) -13.3 (30-yr) bps. US net daily changes went from -0.4 to -3 bps. That slight yield advantage kept the USD favored over peers, be it in technical irrelevant trading. EUR/USD dropped below 1.16. DXY rose from the low 99s towards 99.6. USD/JPY is closing in on the loaded, FX-intervention prone 160 barrier.

Yesterday’s optimistic market view was striking given that it completely looked through Iranian rejection of the proposal. The Middle East country replied with five conditions that need fulfilment before agreeing to any end of the war. International recognition of Iran’s sovereignty over the Strait of Hormuz is a particular thorny one. Meanwhile the US is building up presence in the region, fanning speculation for boots on the ground and a possibly protracted war that spans far beyond the 4-6 week timeframe currently put forward by the US. The conflicting signals inject renewed doubt in the market today, dragging Asian bourses and Treasuries again lower. Brent oil rises 3% to $104/b. The dollar steadies around yesterday’s closing levels. A relatively empty eco calendar keeps the spotlights on the war. That means trading continues to be headline-based and inherently unpredictable. Several Bank of England policymakers hit the wires today. Two of them are among those having dropped their previous call for rate cuts earlier this month.

News & Views

A survey by the British Retail Consortium shows that consumer confidence in the UK collapsed as the Middle East conflict raised the prospect of higher inflation in the months ahead. As stock markets tumbled, both the index of confidence in the economy over the next three months (-56 from -30) as well as consumers’ expectations on their own personal finances (-17 from -6) dropped to their lowest levels on record. BRC analyses that the drop in confidence was most pronounced among the boomer generation who are most reliant on investment and pension funds. Spending expectations rose but BRC analyses, but this was due to the fact that consumers expect to see rising energy costs being reflected across the economy. Data supporting the survey were collected between March 10-13.

RBA assistant governor Kent offered an in depth view on Australian financial conditions and the meaning/reference of the neutral policy rate when setting monetary policy. On the current developments, Kent assessed that heightened geopolitical and economic uncertainty globally have led to some tightening in financial conditions which all else equal implies a decline in short-term neutral rates. However, the supply shock also poses a risk to inflation and longer term inflation expectations at a time when there are ongoing capacity pressures in Australia and several other advanced economies. This could both push short-run neutral rates higher and necessitate a more restrictive stance of policy. ‘A negative supply shock pushes up prices and leads to weaker economic activity, making us all poorer. Central banks cannot change that. But they can ensure that the initial rise in prices does not lead to a rise in longer term inflationary expectations and extended inflationary pressures’ Kent analyses. At the same time, he indicated that it is not the RBA’s intention to force the economy in a recession. It wants to shield the labour market as long as inflation is on a credible path down. The Austrian 3-y yield nevertheless rose 10 bps this morning (4.72%). Markets raised the prospect of a 25 bps next hike at the May meeting from about 65% to 82%. After a correction this week, AUD/USD holds near 0.695.