Markets
ECB President Lagarde yesterday gave an update on the central bank’s views on the current oil price shock. She did so on the sidelines of the IMF/Worldbank annual meetings. Lagarde suggested that the economy currently develops between the ECB’s baseline scenario and the adverse scenario. The same conclusion could be drawn from a presentation delivered by ECB chief economist Lane for the University of Michigan. It shows oil price (current future curve) spiking somewhere between base and adverse, but the shock taking longer (2027 & 2028) to reverse than in both baseline & adverse. The current observed future curve for gas prices is almost spot on the ECB’s March baseline forecast. At its March ECB watcher conference, Lagarde differentiated the central bank’s response between “looking through” a short term (energy) supply shock, making measured and timely adjustments to a medium-term one and making profound changes in the severe scenario. Most ECB comments from the March meeting until now suggested being closer to the adverse one, requiring the measured adjustments. Lagarde thus didn’t go that far yesterday. She repeated that ECB policy is currently well-positioned. It’s too early to say if the ECB can look through higher inflation. It would even be a serious mistake if she already did so. Recall that the base scenario also worked with a Euribor forward curve where 1-2 rate hikes were embedded for 2026. While the ECB wouldn’t hesitate to act on the basis of data, it doesn’t hold a tightening bias. The specific reference to data dependence (April CPI inflation on April 30; same day as ECB meeting) and the recent relief on the energy market (following last week’s TACO) implies that the central bank is currently more erring on the side of wait-and-see for April. A big if remains of course. Just as markets embrace the current cease-fire, the tables can still turn over the next fortnight.
The combination of lower oil prices (prospect of 2nd round of talks between US & Iran; Brent from $99/b to $95/b) and the Lagarde comments triggered bull steepening of European interest rate curves as traders trimmed ECB rate hike bets for this year (from 3 to 2). German yields declined by 3.6 bps (30-yr) to 10.6 bps (2-yr). Changes on the UK Gilt curve were more or less similar with both outperforming US Treasuries. US yields shed 2.8 bps to 4.9 bps with the belly of the curve outperforming the wings. Lower oil prices created a bullish risk sentiment. The EuroStoxx50 gained 1.35% with daily moves in the US ranging between +0.66% (Dow) and +1.96% (Nasdaq). US equity benchmarks all trade back above pre-war levels. The combination of oil and risk sentiment hit the dollar with EUR/USD (1.1796 from 1.1759) equally moving back to the highest level since February. In slightly over a week time, markets went from pricing disaster to pricing an end to the war. The risk balance around that pricing equally shifted, this time leaving room for disappointment instead of hope. US President Trump is predicting “an amazing two days ahead”.
News & Views
US Treasury Secretary Scott Bessent at a Wall Street Journal event yesterday said that tariffs “could be back in place at the previous level by beginning of July.” President Trump’s trade policy suffered a setback after the Supreme Court struck down many of the levies in February, more specifically those introduced under the International Emergency Economic Powers Act (IEEPA) – aka the reciprocal tariffs. The US administration responded with a temporary 10% import duty with a different legal basis, which is due to expire July 24. The goal is to have by then IEEPA levies replicated by others via Section 301 investigations. The latter include probes into country’s industrial overcapacity and forced-labour practices.
For Bank of England policymaker Greene upside inflation risks following the energy price spike were “paramount” to her thinking. She said the danger of an economic slowdown is important but after being above target for the best part of five years and with the impact of previous shocks (Russian invasion) not having worn off even before the Iran war, she’s focused on the inflationary piece of the puzzle. Greene warned for waiting to have all the definitive data that showed there are second-round effects because that would mean the BoE is already to late in responding. Consumer inflation expectations have risen sharply in response to the war but Greene noted that business surveys offered more nuanced signals. UK money markets price a cumulative 35 bps hikes by the central bank this year, compared to the 85 bps seen in the first weeks after the conflict erupted.
 and the Lagarde comments triggered bull steepening of European interest rate curves as traders trimmed ECB rate hike bets for this year (from 3 to 2). German yields declined by 3.6 bps (30-yr) to 10.6 bps (2-yr).){kind=link}