Markets
Markets on Friday (and this morning) tried to assess impact of ongoing elevated oil prices (Brent near $100 p/b) and other energy prices on the economy and central banks’ reaction function as visibility on the end game of the war in Iran remains very low. On Interest rate markets, the pressure of potentially higher, lasting inflation and fears for de-anchoring of inflation expectations, now ever more also filters through toward the long and of the curve. The US curve on Friday even slightly steepened. The rise in yields at the short-end of the curve slowed (at least temporarily) with the 2-y easing/correcting 2.3 bps. The long end, however, extended the rise with the 30-y adding 2.2 bps. The US 10-y yield is nearing the 4.3% YTD top levels. In Europe, yields maintained their upward trend. German yields rose between 2.7 bps (5-y) and 1.5 bps (30-y). The 10-y EMU swap yield closed above the 3% barrier for the first time since end November 2023. The UK yield curve also was testament that inflation fears/expectations ever more affecting the long end of the curve with the 30-y gilt yield closing in on the 5.5% level. Equities in the meantime continue to struggle (S&P -0.61%; Eurostoxx 50 -0.56%). On FX, the dollar remains the by default gainer with the US seen as best equipped to cope with energy-related uncertainty. The DXY index (close 100.36) is challenging the range top that guided trading since end May of last year. EUR/USD (close 1.1417) is nearing the early August low (1.1392).
At the start of the third week of the conflict between the US, Israel and Iran, uncertainty on the outcome military, (geo)politically and with respect to passage (of oil) through the Strait of Hormuz remains as elevated that it was before the weekend. US President Trump this weekend called upon (Nato) allies and even China to contribute to the defense of the Strait of Hormuz. However, for now visibility on the topic remains zero. Brent oil still holds well north of $100 p/b (104). Asian equities indices show a mixed picture trading mostly lower. US future show tentative gains. The dollar trades marginally softer but holds within reach of key resistance levels in the likes of DXY, EUR/USD and USD/JPY. Today’s eco calendar is thin. The US Empire manufacturing and production data are no game-changers. Later this week, the focus turns to a long parade central bank meetings. Markets see about a 60% + chance of the Reserve Bank of Australia tomorrow raising the policy rate for the second consecutive meeting (to 4.10%). The move was already debated before the war in the Middle East, but it added to the inflationary risks. Later this week the Fed and the Bank of Cananda (Wednesday), the BoE, ECB, Riksbank, SNB and the Czech national Bank (CNB) on Thursday and the BoJ on Friday decide on policy. For now, markets still expect them to hold policy unchanged and assess the impact of recent developments. In the current (rapidly evolving context) central banks will be cautious to make any strong commitments. Even so, with pressure also rising at the longer end of the curve, they will have to convince markets on their determination not to allow a de-anchoring of inflation expectations, if the energy prices stay higher for longer and are at risk of filtering through into second round effects. In this context, yields probably will hold recent gains, with the focus now also further turning to the long end of the curve.
News & Views
China released a batch of stronger-than-expected economic data this morning. They traditionally combine January and February numbers to smooth out distortions caused by the timing of Lunar New Year. Retail sales growth was 2.8% YTD YoY in February, vs 2.5% consensus. Also industrial production (6.3% YTD YoY) and investments (1.8% YTD YoY) managed to get over the bar. Infrastructure investments (11.4% YTD YoY) increased at the fastest pace since 2021. Data suggest that China’s economy started the year on a stromer footing than expected, but external shocks obviously pose short-term threats to that momentum. Earlier this year, China lowered its annual growth target to 4.5%-5%, the slowest pace since 1991. USD/CNY hovers around 6.9 since the start of the war in the Middle East, ending almost over a year of gradual CNY-appreciation which brought USD/CNY to lowest levels since mid-2023.
The Internation Energy Agency said that oil from the emergency reserves will soon start flowing. Last week, IEA member countries announced to make 400mn barrels of oil available to the market. Individual implementation plans indicate that stocks will be made available in Asia/Oceania immediately while stocks in the Americas and Europe will be made available starting from the end of March. Other oil-related news flow remains mixed with Iranian FM Araghchi for example stating that the Strait is operational for international shipping apart from any vessel linked to the US and Israel. On the other hand, the Houthi movement in Yemen aligned with Iran in threatening a total blockade of that other crucial strait (Bab el-Mandeb) in the Red Sea.
