Markets
The by-nature fragile ceasefire between the US and Iran was weakened severely by yesterday’s skirmishes in the Persian Gulf but survives so far. US Defense Secretary Hegseth detailed Operation Freedom in a press conference today, calling it a defensive and temporary mission to open up the vital Hormuz Strait and added that while the US is locked and loaded, it isn’t “looking for a fight”. Monday’s developments had pushed Brent oil towards the $115 barrier. Prices ease a bit today to around $112. In a broader perspective, the current actual level of oil prices is perhaps not the worrying part. On a closing basis, they haven’t so far surpassed the pre-ceasefire peak just short of $120. But what is changing is that markets are becoming increasingly concerned on the longer-term fall out of the conflict. There are non-linear consequences tied to the duration of the (oil, fertilizer, helium, LNG …) supply disruption in terms of the time it takes to normalize and inflation. The Brent forward curve is shifting higher by the week with financial markets for example now pricing in an at least $100 price through September this year.
Markets move on the rhythm spelled by oil so we’re seeing core bond yields correct a little lower from yesterday’s surge on the slight drop in Brent today. Bund yields change -4 bps to +0.6 bps in a bull steepening move. Net daily changes in the US vary between -0.8 (30-yr) and -1.4 bps (2-yr). It is telling how ultralong maturities barely respond, highlighting the presence of risk premia. The US 30-yr yield rests at 5%, the German variant is on the verge of reaching new 15-year highs. UK markets were closed yesterday for May Day and are now catching up. Gilt yields rally 10-12 bps. The UK 30-yr yield hit its highest level since 1998. European equity markets recoup some of the 2% losses at the start of the week with gains mounting to 1.4% (EuroStoxx50). US equities open between 0.2 and 1% higher. FX markets are treading water. EUR/USD is flat on the day around 1.17. Same goes for the trade-weighted dollar index around 98.5. The yen is among the few showing some volatility. Drawing conclusions comes with caution since Japanese markets are closed through Wednesday. Last week’s interventions (reportedly) are being further undone for a third day straight. USD/JPY hit a two-month low of 156.6 but has recovered the last couple of trading sessions to 157.8 currently.
The March JOLTS report and April US services ISM were perhaps the only important event from a market point of view today. The headline number printed in line with expectations at 53.6. The new orders component retreated more than expected from March’s 60.6 to 53.5 while the unemployment gauge improved to a still contractionary 48. Prices paid stabilized at a 4-year high of 70.7, defying odds for an uptick to 73.5. March JOLTS job openings at 6.8 million were in line with the readings of the last year so far. Both the USD and yields shrugged at the outcome.
News & Views
The Swiss Statistical office today reported headline inflation in the country in April accelerated to 0.3% M/M and 0.6% Y/Y (from 0.2% M/M and 0.3% Y/Y in March). The monthly rise was due to factors including rising prices for petrol, diesel and heating oil. Prices for air transport also increased, as did international package holidays. Core inflation was unchanged M/M and even eased to 0.3% Y/Y from 0.4%. Especially inflation of domestic products (-0.1% M/M, 0.5% Y/Y) remains very modest which is also visible in subdued services inflation (0.1% M/M and 1.1% Y/Y). Imported good prices accelerated further to 1.5% M/M and 0.9% Y/Y (from 1.8% M/M and -0.3% Y/Y). Goods price deflation is gradually coming to an end (0.6% M/M and -0.2% Y/Y from -0.7%Y/Y). With inflation holding in the lower part of the 0-2% band, the SNB can feel comfortable to hold the policy rate at 0%. A risk-off spike in the franc caused EUR/CHF to test the 0.90 area early March. Strong SNB intervention warnings (and perhaps to be confirmed actual CHF) caused the franc to settle in the 0.915/0.925 trading range over the previous month.
The minority government of Romania led by Ilie Bolojan was toppled after a confidence vote supported by the nationalist far right AUR (Alliance for the Unity of Romanians) and the Social Democrats (PSD). The latter left the collation last month over disagreement with some austerity measures that PM Bolojan introduced to address a 7.65% budget deficit (2025). Reforms were a condition for the country to get access to additional EU funds. The country now faces a (potentially long) period of political uncertainty as it might not be evident for the President to bring together parties that are able/prepared to form a majority in a fractured parliament. The Romanian leu at 5.217 trades near its all-time low against the euro. A 10-y domestic government bond shows a yield near 7.25%.
