Markets
The oil price (Brent) hovered around the $90/mark yesterday following Monday’s wild swings. Talk that the US navy escorted an oil tanker through the Strait of Hormuz was later denied by the White House. Overnight, the WSJ reports that the International Energy Agency has proposed the largest release of oi reserves in its history. The release would exceed the 182mn barrels put out in two releases in 2022 after the start of Russia’s invasion of Ukraine. Countries are expected to decide on the proposal today. It would be adopted if none objects, but even one country’s protests could delay the plan, officials said. IEA members hold 1.2bn barrels in public stocks, plus another 600mn in mandatory commercial inventories according to IEA Executive Director Birol. It’s one of the developing stories to look out for today as fighting in the Middle-East continues. A potential release could help lower short-term market volatility.
After European close, ECB President Lagarde spoke on France 2. She stressed that the EMU (economy) is in a better situation than during the 2022 energy price shock with a greater capacity to absorb shocks. The ECB president struck a vigilant tone, saying that they will do all that is necessary to ensure inflation is under control and avoid a repeat of the inflation increases like those in 2022-2023. The high amount of uncertainty makes her incapable to say precisely what the ECB will decide next week, but the central bank won’t rush into a decision. While EMU money markets on Monday at one point discounted two rate hikes this year (currently just one), they never wagered bets that it could happen very soon. The ECB publishes new quarterly growth and inflation forecasts next week and those will likely be accompanied with additional scenarios due to volatile energy prices.
Today’s eco calendar contains February US CPI. Our in-house KBC nowcast model expects both headline and core inflation at 2.5% Y/Y. Consensus stands at 2.4% and 2.5% respectively. With regard to coming months, we conducted some simulations based on oil price developments. Our pre-Iran base scenario suggested annual inflation prints of 2.8% and 2.9% in March & April. Taking into account current gasoline prices ($3.5/gallon) lifts those readings to 3.1% and 3.4%! An in-between scenario of $3/gallon implies 2.8% and 3% levels according to the nowcast. If anything, it shows how rapidly inflation numbers might be impacted by the ongoing conflict, warranting vigilance by the Fed as well. The US Treasury continues its mid-month refinancing operation with a $39bn 10-yr Note auction. Yesterday’s 3-yr Note auction disappointed with the auction tailing 1.1 bp compared to the WI yield. Bidding metrics also showed a below-average bid cover of 2.55 with lower than expected accepted indirect and direct bids. The long end of the US yield curve might be vulnerable in case of weakness tonight and in tomorrow’s 30-yr Bond sale given the US’s limited fiscal leeway (to fund a lasting war).
News & Views
The Financial Times this morning reported that US bank JPMorgan Chase informed private credit lenders that it has marked down the value of certain loans in their portfolios. Since these loans serve as collateral that the funds use to borrow from the bank, the move means JPMorgan is limiting the amount it is lending to private credit groups going forward. The loans that have been devalued are to software companies. Just last week, the bank’s chief executive said they were being more prudent vis-à-vis software assets, which are seen particularly vulnerable to AI disruption.
The UK’s Office for Budget Responsibility warned its inflation forecasts in the spring update of earlier this month could quickly become outdated if the energy price spike does not abate. David Miles, a member of the OBR committee before UK parliament noted that “we (the UK) are significant importers of both oil and gas, and there’s nothing but negative effects from those prices being higher.” The OBR had penciled in a return from 3% to 2% by end this year. A “very substantial” increase in oil prices, however, would keep the inflation rate on 3%. The potential broader price effect of the energy spike already resulted in a dramatic repricing from money markets. At some point, they fully priced out two further rate cuts and started prepping for a hike. Tensions eased (including in oil markets) somewhat in the last few days, with UK investors now discounting a 50% probability for a rate cut by mid-2026.
