Markets
Markets are in some kind of wait-and-see stance today after the energy-repositioning of the previous two weeks. Bond yields drop a few bps. The dollar eases off recent top levels and equities avoid a further decline. It is unclear what label/explanation is appropriate. Is it markets hoping that a solution on the passage of energy through the Strait of Hormuz might be possible in a not that distant future? It doesn’t seem that evident. The call of US president Trump to countries including China and Nato allies to join US action to keep the Strait open, if any, only received lukewarm response. Other political comments this weekend neither suggest a profound de-escalation. Probably, today’s price action is only a reflection point with investors pondering what might already be priced in, moving to a more agnostic approach. This reasoning especially might apply to interest rate markets with the likes of the Fed, the ECB, the Bank of England, the Bank of Japan and several other central banks deciding on policy later this week. For those still in the process of normalizing policy toward a more neutral level (Fed, BoE), easing expectations have been reduced sharply. For the Fed only one 25 bps step is still discounted by eoy (to be compared to 2+ steps before the start of the war). For the Bank of England two 25 bps cuts priced in end-February now even have turned into tentative speculation that Bailey and the MPC might be forced to hike late this year. Similar narrative for the ECB (from 50% anticipation of a rate cut in H2 before to war to 1+ hike priced in H2 2026). Long term yields in the US and Europe on Friday tested key levels last Friday (US 10-y nearing YTD top at 4.30%; EMU 10-y swap at 3% testing the highest levels since Nov 2023, German 10 & 30-y testing/only a whisker away from the highest levels since 2011 !!). That battle might continue in case of more signs that the conflict lasts longer and with risks of second round inflation impact. US yields today are easing by 3 bps (2-y) to 5 bps (10-y). German yields are correcting between 5 bps (2-y) and 3 bps (30-y). UK yields eases 6-7 bps across the curve. Despite today’s move, markets will scrutinize central bank’s decisiveness and commitments to avoid a 2022 scenario. On other markets, oil eases off the intraday peak levels, but Brent still holds near $100/b. Equities in the US and Europe try to beak last week’s downward spiral (Eurostoxx 50 + 0.85%, S&P 500 + 1.25%). However its too early to draw any conclusions, even from a technical point of view. The dollar rally takes a breather, with important resistance levels nearby. DXY (99.85) this morning tested the 100.5 area (top end May last year and top of MT sideways consolidation range). USD/JPY holds near 159 after setting a new YTD top on Friday and with the key 160 reference still within reach. EUR/USD (1.149) rebounds off the 1.1411 area with the August low at 1.1392 still the main technical reference.
News & Views
Canadian inflation rose by 0.5% M/M in February, a slower pace than consensus expected (+0.7%). Annual inflation fell from 2.3% to 1.8% (vs 1.9% consensus), back below the Bank of Canada’s 2% inflation target for the first time since August of last year. Base effects were in play because of the end to the goods services and harmonized sales tax break halfway into February of last year. Gasoline prices moderated the slowdown in CPI (-14.2% Y/Y vs -16.7% Y/Y in January-. A 3.6% M/M increase in gasoline prices was already the result from higher crude oil prices in the lead-up to the conflict in the Middle East, as well as oil supply disruptions in some producer countries. Measures of core inflation, including the central bank’s preferred trimmed mean remain sticky above 2% (2.3% Y/Y from 2.4%). Goods prices increased 0.5% M/M to be up 0.5% Y/Y while services prices rose by 0.6% M/M and 2.7% Y/Y. Canadian markets are unnerved by the outdate numbers and follow today’s global market moves.
The Bank of International Settlements released its quarterly review. It focuses on market recalibration amid shifting currents. Inflation expectations edged up, leading investors to revise expectations of policy rates upwards and push back the expected timing of US rate cuts. Hyun Song Shin, head of the Monetary and Economic Department warned that “if the conflict persists or widens beyond current expectations, that could trigger sharper adjustments in inflation expectations and financial conditions. A spike in interest rates could put pressure on rich asset price valuations and rising financial costs for governments and the need to issue more debt could undermine fiscal sustainability.”
