Markets
One day. That’s all core bonds got in terms of reprieve. Bunds greatly underperformed Treasuries yesterday with huge offloading leading to net daily yield increases varying between +2.9 (30-yr) and +11.7 bps (5-yr) in a bear flattening move. Markets took aim at short-dated bonds amid rising expectations for ECB rate hikes. The market implied probability shot up to 65% (75% even, at some point) for a first move by end this year. This compares with a 55% chance end last week, before the Iran war erupted, for a rate cut. ECB meeting minutes released yesterday suggested that the central bank is ready to respond in both ways. That came amid a slew of warnings from the likes of de Guindos (ECB VP), Rehn (Finland) and Nagel (Germany) that a prolonged war in Iran may push up inflation (expectations). ECB policymakers have learned from the Ukraine war in 2022. Back then they wrote off the energy-led price spike as transitory. That may have been the case in the bygone era of a structurally low inflation. But things have changed. Oil prices meanwhile whipsawed on questionable headlines stating that Iran was ready to give up its highly enriched uranium stockpile and the Iranian commander of the ground forces saying that closing the Strait of Hormuz is not something they “believe in”. This morning, however, reports of a near-total halt of shipping traffic in the key oil artery for global supplies. Everything suggests oil prices to remain at elevated levels so long missiles are crossing Middle East air. It makes the US government contemplate to take action in the futures market to keep prices contained. Brent topped the $85 barrier yesterday and this morning for the first time since mid-2024. Dutch TTF gas futures pared initial 12% gains to 4% (>€50/Mwh). A looming energy crunch after the European economy barely recovered from the one in 2022 dents the appeal of regional assets. Stock markets tumbled 1.5% (EuroStoxx50). The euro lost territory, but losses could have been bigger. EUR/USD hovered around 1.16+ levels.
US yields trended higher but lacked European speed. The curve shifted 1.8-4.5 bps higher with the belly of the curve underperforming wings. Today’s payrolls have the potential to extend this week’s recovery. Fed Bowman said yesterday the labour market is showing additional evidence of stabilizing, indicating she favours the current rates status quo. There’s a long list of other Fed policymakers ready to air their thoughts before the quiet period kicks in this weekend. A solid labour market report may put the growing inflation risks even more in the spotlight, away from downside employment risks. Rate cuts could be pushed further out in time with markets for all of 2026 no longer pricing in two full rate cuts since this week. Against this backdrop we hold a bullish bias for the US dollar going into the weekend.
News & Views
The US Office of Foreign Assets Control (OFAC) of the US Treasury Department delivered a temporary license/waver to allow Indian refiners to buy Russian oil. The license applies to transactions of Russian crude oil and oil products that were loaded on/before March 5 with an expiry data as of April 4. US Treasury Secretary Scott Bessent indicated that the measure should be considered as a short-term measure to ‘enable oil to keep flowing into the global market’. The US assesses that the transaction will not provide significant financial benefit to the Russian government. It only authorizes transactions involving oil already at sea. The move is seen as a marked change in policy as the US in the recent past forced India to decouple from Russian oil purchases due to the war in Ukraine.
In an interview with Bloomberg published this morning, policymaker Henryk Wnorowski indicated that the National Bank of Poland (NBP) will avoid rate cuts until the war in Iran ends. Wnorowksi now indicates that likelihood of the policy rate to reach the 3.25%/3.5% as decreased dramatically. The comments come as the NBP on Wednesday still cut the policy rate by 25 bps to 3.75% as new projections showed that inflation was seen holding near the 2.5% target over the horizon till 2028. Referring to this week’s rate cut, the NBP policymaker indicated that leaving the policy rate unchanged this week would have sent an additional worrying signal to financial markets as already suffered from uncertainty due to the war in the Middle East. Despite the rate cut on Wednesday, the Polish 2-y swap rate yesterday already gained another 7 bps (to 3.80%) after rising sharply earlier this week (3.55% close on Friday). After weakening from levels near EUR/PLN 4.2175 end last week, the zloty now hovers around EUR/PLN 4.2725.
