Market focus remains on oil as the week kicked off with prices surging to USD120 per barrel. They declined quickly again but remain elevated around USD100. The IEA’s announcement of a record release of 400 million barrels from strategic oil reserves did little to calm markets, probably because the decision was anticipated and it lacks details on the pace and breakdown of reserve sales. This accounts for around 20 days of supplies from the Strait of Hormuz and likely more since Saudi Arabia and UAE could reroute some supplies.
The IEA expects world output to fall by 8mn b/d in March, as it reports “The war in the Middle East is creating the largest supply disruption in the history of the global oil market”. The tense situation has continued to weigh on bond markets and energy importers’ currencies such as euro and yen.
Governments are looking into different measures to ease the energy hit on businesses and consumers. Croatia has already introduced a time limited cap on motor fuel and Austria a cap on power prices. Bigger countries such as France and Italy are monitoring petrol pump prices for excess profits but have refrained from announcing price caps so far. The EU is also looking into measures according to the Commission President. It could lead to larger deficits and increased debt issuance.
US February CPI inflation was unchanged at 2.4% in line with expectations, as energy prices rebounded already ahead of the war in the Middle East. Looking ahead, the war in the Middle East will obviously continue to draw heavy attention from markets. One fix point worth keeping an eye on will be US strategic oil reserves. Elsewhere, trade delegations from US and China will meet for a new round of trade talks. On the data front, the big batch of Chinese data covering two months will be of particular interest. We expect a slight pick-up in retail sales from a low level. Data on the weak housing market will also be in focus.
Next week is packed with central bank meetings. While we expect all the major central banks on hold for now due to the uncertainty on energy markets, it will be very interesting to hear whether central banks will lean towards cutting or hiking rates, if supply disruptions trigger longer lasting energy scarcity. Markets certainly lean towards hikes, and we acknowledge the risk some central banks will be fighting the last war and risk hiking rates too early.
We expect the ECB to signal readiness to act to upward price pressures but at the same time acknowledge heightened uncertainty and that it is too early to draw firm conclusions. The Bank of England is set to pause its cutting cycle as the energy shock blurs the UK’s disinflationary path. The Fed is in a good position to wait and see how the war in the Middle East plays out and is not in a hurry to provide strong forward guidance about its next policy changes. We expect Powell to strike a cautious tone at the press conference.
Japan is the outlier being on a hiking cycle and while real wage growth turning positive for the first time in over a year in January supports hiking further, surging energy prices is threatening to undermine the recent purchasing power recovery.
