Markets
The military conflict between Israel and Iran adds another layer of uncertainty both to the CB’s assessment as well as in shaping the market reaction function. A soft oil price of late was an important factor supporting the disinflationary process. This ‘easy inflation win’ might evaporate as the conflict continues. Additional overall uncertainty might weigh on growth, raising stagflationary risks. A highly uncomfortable mix for central bankers. Still market moves today remain moderate and orderly. Brent oil this morning temporary jumped to $78 p/b, but soon eased to currently trade near $73 p/b. Markets apparently don’t expect an major supply disruption from the Persian Gulf region yet. This assessment of course can change instantaneously. Even so equities also reverse part of Friday’s setback, apparently taking the view that (regional) geopolitical uncertainty often only has a temporary impact on markets. The EuroStoxx 50 adds 0.6%. The S&P opened with a similar gain. Interest rate markets for now don’t see this additional layer of uncertainty as a reason from central banks to shift to a more benign, growth supportive bias. On the contrary. Majors CB’s, in particular the Fed, recently indicated that low visibility on the impact of trade policy or other sources of uncertainty was a reason to await better insights before moving to next policy steps. US yields add between 1.5-3 bps across the curve. After underperforming on Friday, German yields today trade little changed, paring earlier gains of as much as 5 bps. ECB’s heavyweights Nagel and de Guindos at least also guided toward a more reactive wait-and-see approach. Nagel said that as policy no is no longer restrictive, the ECB should retain full optionality to cope with the high level of uncertainty, both on growth and on inflation. ‘Pre-determining the future – neither a further interest rate cut nor a pauze in monetary policy- is not sensible’, Nagel was quoted. He also warns that the ECB, having reached some kind of mission accomplished on inflation, there is no reason for complacency. ECB Vice President Luis de Guindos in a similar vein said that he sees little risk for inflation falling too low. He also said that the euro at current levels shouldn’t be a big obstacle as its recent appreciation had not been volatile nor (too) rapid, two key factors he is looking at. This at least sounds as a ’nihil obstat’ for a strong euro. At least today, after a brief oil-driven setback on Friday, EUR/USD is again rather well bid (currently EUR/USD 1.158). The dollar overall still struggles to avoid further losses (DXY at 97.9 with the YTD low at 97.6). The yen holds near USDJPY 144 as market look forward to tomorrow’s BOJ decision. Sterling remains in the defensive after a set of disappointing data last week. With the BOE still further away from its inflation target, e.g. compared to the ECB, the higher oil prices poses an additional challenge for the BoE. The BoE this way being hampered to move to a more growth supportive stance is no help for sterling. EUR/GBP today rose further to 0.8525.
News & Views
Switzerland’s State Secretariat for Economic Affairs lowered its 2025 and 2026 growth forecast to 1.3% and 1.2% respectively, from 1.4% and 1.6% expected in March. The downgrade comes amid high uncertainty regarding international trade and economic policy. Export performance, which the country heavily relies on, is seen weakening significantly for the remainder of the year after a strong start due to a frontloading effect ahead of Trump’s tariff announcement. The growth adjustment comes ahead of Thursday’s Swiss National Bank’s policy meeting. A rate cut to 0% from 0.25% is widely expected amid sub-target inflation. The key question then pops up whether policymakers eye a return to below zero. The likes of SNB governor Schlegel have never excluded it in the face of the strong Swiss franc and its disinflationary impact. EUR/CHF today trades around 0.939.
The nominee for vice-governor of Hungary’s central bank Daniel Palotai told lawmakers during his confirmation hearing that the MNB’s priority is to break inflation and anchor it at its 3% medium-term target. To do so Palotai favours a cautious, patient and data-dependent monetary policy approach, echoing the central bank’s current stance. He noted that inflation was sticky, in particular in core and services prices. Palotai was nominated by Hungarian prime minister Orban and will become the fourth deputy governor, a position created earlier this month by parliament as part of an overhaul of the institution’s leadership. The Hungarian forint outperforms regional peers today with EUR/HUF easing to 401.4.
