The week started on a now-usual pattern, with oil prices pushing higher at the open and retracing part of their gains as investors digested the latest news from the Middle East. The major developments include the bombing of the major Iranian export hub late Friday, Iran’s announcement that the Strait of Hormuz could be used by countries that are not the US, Israel and their allies – though it remains unclear how “allies” would be defined and enforced – and the announcement from the IEA that oil reserves (you know – the 400 million barrels they’re ready to release from strategic reserves) could be made available immediately in Asia, which is the region most dependent on oil passing through this very Strait of Hormuz.
Overall, the bombing of Kharg Island – and the continued attacks between the parties – suggests the conflict is not close to an end.
Still, there is some relief in Asia this morning on news that two tankers carrying liquefied petroleum gas to India were able to sail through the strait. The US has asked countries around the world to send ships to the region to help keep shipping routes open. The response, however, has been mixed – it is indeed a very politically and geopolitically sensitive call to make.
US crude kicked off the week with a spike above $100 per barrel and is now consolidating near $98.50, while Brent started just below the $100 mark and is now trading slightly above it. Dubai crude is diverging, with the barrel trading above $123.
The relief that oil could continue flowing toward Asia pushed several regional indices higher: the Nikkei is up nearly 1% at the time of writing, the Korean Kospi is rebounding more than 1%, while China’s CSI 300 dipped at the open but managed to retrace early losses on data showing better-than-expected investment, production and retail sales figures, although the uptick in the unemployment rate raised concerns.
Now that we’re speaking of data, Friday’s US figures came with surprises – and not necessarily good ones. US GDP was revised further down to 0.7% for Q4, from 1.4% printed a month earlier and well below the 4.4% recorded in Q3. Sales grew just 0.4%, while price pressures increased to 3.8%. More recent data showed that the core PCE index – the Federal Reserve’s (Fed) preferred gauge of inflation – ticked higher to 3.1% in January from 3.0% the month before. The uptick was broadly expected and priced in, yet confirmation that price pressures were already rising before the Middle East conflict pushed energy prices higher did little to reassure Fed doves.
The Fed will meet this week and will most probably leave rates unchanged. Pressure from the White House is unlikely to change that – especially after the reason Jerome Powell was attacked by the White House was judged to be “thin and unsubstantiated”. So no rate cuts this week in the US – and possibly none this year. If the war continues and keeps energy prices elevated, rate cuts will remain unlikely.
The US 2-year yield is now at its highest level since last August, while the US dollar index spiked to the highest levels since November. The greenback is softer in Asia this morning – which is also supporting regional equities – but the conflict is far from over, and the US dollar’s appreciation could continue in the coming weeks, alongside rising global energy prices and fading expectations of Fed easing.
The Fed is not the only central bank delivering a decision this week. The calendar is packed with major policy meetings: the European Central Bank (ECB), the Bank of England (BoE), the Swiss National Bank (SNB), the Bank of Japan (BoJ), the Reserve Bank of Australia (RBA) and the People’s Bank of China (PBoC) will all announce their latest policy decisions, and their task is not an easy one.
All of them will be torn between the upcoming spike in inflation due to rising oil and gas prices and the threat of slowing economies and rising unemployment.
The ECB, for example, was expected to stay put on rates just two weeks ago, but markets are now wondering whether the bank may need to tighten further to avoid “making the same mistake” as during the energy crisis triggered by the invasion of Ukraine.
The BoE, meanwhile, had been expected to cut rates on confidence that inflation was heading toward the 2% target and that easing could support the economy. And the British economy clearly needs help: recent data showed that the UK economy didn’t grow at all in January. Unfortunately, the UK may not get that help just yet – the BoE will first have to deal with the renewed inflationary pressures before supporting growth.
The SNB is expected to keep rates unchanged; the strong franc could help counter the impact of rising oil prices on inflation and allow the SNB to stay on hold for a while. For the BoJ, rising energy prices and the notable depreciation of the yen will likely keep the bank on a path toward further normalization. The RBA, on the other hand, is expected to announce a 25bp hike on Tuesday to address inflation risks.
Overall, if we summarize in one sentence: central banks around the world are likely to deliver hawkish signals, and that could weigh on sentiment this week if Middle East tensions do not de-escalate.
Happily, for those who are craving for other things to talk about, the NVIDIA GTC taking place between today and Thursday could shift the spotlight back to AI, as Nvidia and Jensen Huang are expected to unveil the latest chip roadmap—announcements that often ripple through the broader tech sector and move semiconductor stocks. Let’s see if they can find space in the war-crowded headlines.
