Markets
Crude oil is at the front and center once again. Brent rises sharply to $109/b, coming from levels around $100 and even temporarily below that amid optimism that the Middle East conflict could end soon. US president Trump upended any hopes during his 19 minute speech yesterday during which he vowed to hit Iran “extremely hard” in the coming weeks. And if Iran doesn’t strike a deal, the US will begin targeting its electricity and oil facilities. The speech is an escalation, not a hoped-for clear timeline for US withdrawal. Trump’s strong language use reveals a growing frustration, including vis-à-vis the blocked Strait of Hormuz. Being a net energy exporter helps cushion the economic blow but since oil is a globally priced commodity it does not make the US immune to price rises. Joe Sixpack is already paying $5.5 per gallon for diesel, the highest since mid-2022. Gasoline currently stands at $4.08, a similar near-four-year high. Sharply rising pump prices leave consumers with a nasty taste going into the November mid-terms. Europe meanwhile is facing outright shortages (eg. French gasoline stations running dry). Diesel prices have pushed to a barrel equivalent of $210. Prices peaked at around $220 shortly after the Russian invasion.
Surging oil prices have their now-familiar impact on other core market areas. Yield curves bear flatten with central bank hiking bets raising the short end of the curve, increased risk premia do the same for the long end. German rates add between 5.7 and 7 bps. UST Treasury yields add 2.6-3 bps across the curve. Gilts hugely underperform after doing the opposite yesterday – amongst others thanks to governor Bailey pushing back against “markets that get ahead of themselves”. UK yields rally 7.3-9.3 bps. King dollar rules with investors being cautious for the long Easter weekend. Both US and European markets close tomorrow and the US administration has often used non-trading days as an opportunity for big moves (geopolitically, trade-related or otherwise). DXY bounces back to north of the 100 barrier. EUR/USD in a mirror move slides towards but remains above the 1.15 handle. The yen nears USD/JPY 160 again and cable (GBP/USD) risks breaking below 1.32 support. Risk off pushes equities down more than 2% in Europe and between 1.25-1.75% on Wall Street.
News & Views
Swiss inflation in March rose 0.2% M/M and 0.3% Y/Y (0.6% M/M and 0.1% Y/Y in February), falling below expectations (0.5% M/M). The Swiss Statistical Office noted the rise was due to several factors including rising prices for heating oil and international package holidays. Prices for air transport also recorded an increase, as did those for petrol and diesel. Core inflation (ex. fresh & seasonal products, energy and fuel) was unchanged (0.4% Y/Y). Prices for domestic goods declined 0.2% M/M but were 0.5% higher Y/Y. Prices of imported goods rose 1.8% M/M but were 0.3% lower Y/Y. The report for now only shows a ‘modest’ direct price increase following the Middle East conflict. The broader impact still has to become apparent later. With inflation still in the lower part of the 0%-2% price stability band, the Swiss National bank for now has room to wait and see. Markets discount about 75% chance of a rate hike in September. This room for the SNB to wait and strong verbal warnings on the SNB’s determination to address unwarranted CHF strength for now might bring the franc in somewhat of a more neutral position. EUR/CHF recently rebounded from the 0.90 area mid last month to currently 0.9215.
The Bank of England today published its March Decision Maker Panel data. This CFO survey was conducted between 6-20 March. Firms reported realised annual own-price growth at 3.7% in the three months to March (from 3.8%). Year-ahead own-price inflation was expected at 3.5% in the three months to March, but single month data increased from 3.4% to 3.7%, pointing to firms adjusting expectations due to recent increases in energy prices. Expectations for year-ahead CPI inflation accelerated by 0.5ppts to 3.5%. Overall uncertainty rose with 57% of firms reporting that the overall level of uncertainty facing their business was high or very high (+10 ppts from Feb.). Firms realised annual employment growth at -0.3%, down from -0.2%. Expectations for employment growth over the next year were unchanged at 0.1%.
