Markets
This week is packed with multiple high profile market topics including policy meetings of the major central banks, earnings from multiple tech majors and a several key data series including, especially in current context, keenly waited EMU inflation data and a Q1 US growth estimate amongst others. However, these days any prepositioning to these ‘top events’ remains highly conditional and is even some kind of paralyzed by the developments regarding the US-Iran conflict. At an earlier phase in the conflict, proposals on a ceasefire and/or headlines on (potential) new negotiations mostly triggered some constructive moves in the oil, bond and equity markets. However, this market reaction function has changed to ‘first see, then believe’ attitude. In this respect, a proposal by Iran to open the Strait of Hormuz in return for the US lifting its blockade on Iran and at the same time delaying talks on Iran’s nuclear program, didn’t yield much market enthusiasm anymore, on the contrary. The stalemate in the negotiations now causes a gradual but protracted further rise in the oil price, with Brent closing at $108.25 p/b reaching the highest level in about three weeks as markets understand that any ‘normalization’ in supply from the Persian Gulf will take (a very) long time. This creates a strong floor for yields, including measures on inflation expectations. Bund yields yesterday added between 2.5 bps (2-y) and 4.1 bps (30-y). Headlines on governments (potentially) giving some additional fiscal leeway (cf. Germany infra) doesn’t help to mitigate upside pressure at the long end of the curve. US yields in a similar way added between 1.9 bps (2-y) and 3.9 bps (30-y). (US) equities didn’t go anywhere (S&P 500 +0.12%). For now, the stalemate/paralysis regarding the conflict also doesn’t help the dollar that much even as sometimes there remains a mild intraday link with oil prices. The DXY index closed the session little changed at 98.5. EUR/USD still closed north of 1.17 (20).
The BOJ this morning left its policy rate unchanged (cf infra). With no concrete progress on the US-Iran talks (US maintains ‘red lines’ on Iran nuclear program), oil extends its ascent (Brent $110 p/b), challenging CB’s (including the ECB’s) wait-and-see approach. Yields remain upwardly oriented this morning. Dollar gains, if any, for now remain limited again (EUR/USD 1.171). US eco data include weekly ADP labour market data and consumer confidence (Conference Board) with the latter providing an update on US consumers’ reaction function to higher (energy) prices. In Europe, the (March) ECB inflation expectations survey deserves more than average attention. Quite a ‘symbolic’ release as the ECB has to clarify its reaction function at Thursday’s policy meeting. The National Bank of Hungary is expected to keep its policy rate unchanged (6.25%) in its first meeting post the April elections/political landslide.
News & Views
The Bank of Japan kept the policy rate unchanged at 0.75% this morning. Internal division grew with Nakagawa, usually a consensus figure, joining Takata and Tamura in calling for a rate hike. They cited upward inflation risks while price stability is more or less achieved and financial conditions are still accommodative. A majority of six, however, saw value in waiting given the downside risks to economic growth posed by the Middle East conflict. GDP forecasts for the current fiscal year was cut in half to 0.5%. 2027 saw a minor adjustment to 0.7% and the first reading for 2028 reads 0.9%. Inflation projections on the other hand were forcefully lifted to reflect the energy price shock and its risks. The BoJ’s preferred CPI gauge (ex. food) was raised to 2.8% and 2.3% from 1.9% and 2% for 2026 and 2027. 2028 is seen at 2%. It sees price stability hit between the second half of fiscal 2026 and fiscal 2027 to remain at around that level thereafter. Today’s hawkish hold sets the stage for BoJ action in June with odds rising to 70%. The 2-yr yield rises this morning to 1.38%, coming close to the 1.4% multidecade high seen earlier this month. The yen strengthens slightly, pushing USD/JPY down to 159.12.
Germany’s finance ministry is keeping the door open to suspend the constitutional debt brake, it spokeswoman said yesterday. While rejected by Chancellor Merz and his party, the Socialist-led finance department said the government is constantly monitoring the impact of the Iran war on the economy and examining necessary measures. A suspension is currently not in the works, the spokeswoman said, but acting with foresight and vigilance is required. Germany lifted the brake back in 2020-2022 and did so again in 2025 to allow for massive defense spending. The former was temporary and based on the emergency clause (requiring a simple majority), which is also how it would potentially work anno 2026. The 2025 decision was a permanent constitutional reform (requiring a two-thirds majority).
