Markets
Markets yesterday again showed some hefty swings as mutual attacks on energy installations by both Iran and Israel caused the market to further move to a scenario where higher energy prices and supply disruptions might last longer than hoped for. Enter central bank assessments of the likes of the ECB and the Bank of England. The Bank of England left its policy rate unchanged at 3.75%. Four calls/votes for a 25 bps cut in February were removed. The BoE sent strong language to the market that it stands ready to react so that inflation remains on track to return to the 2% target as higher energy prices were seen a risk of reviving second round effects. The February scenario of inflation moving relatively quickly to 2% traded for an assessment that it might stick between 3%-3.5% instead. UK yields markets initially continued to reposition after the oil price spike earlier in the session, with some easing due to ‘lower’ oil prices later in the session. At the end of the day UK yields still rose between 30.5!! bps (2-y) and 2.7 bps (30-y). Money markets now discount 50% of a first 25 bps hike in April. By Q4 almost three hikes are priced in. Despite the BOE commitment and favorable interest rate support, sterling gained only modestly against the euro, closing still north of the 0.86 resistance (0.863). The ECB left its policy rate unchanged at 2% and provided the market with a framework on how they expect the economy to react to the oil price shock, providing a baseline, adverse and a severe scenario. In its baseline scenario inflation is seen rising to 2.6% this year (vs 1.9% in Dec) and 2% in 2027% (from 1.8%). In an adverse scenario the ECB assumes oil prices to peak at $119p/b in Q2 2026, before converging to the baseline assumptions by Q3 2027. This might cause inflation to jump to 3.5% this year, assuming unchanged monetary policy. In its assessment the ECB indicated that it is well positioned to address the new context and that it is determined to ensure that inflation stabilizes at the 2% target. With developments in the Middle East yesterday moving in the direction of at least the adverse scenario, German ST yields still rose 14.5 bps (2-y). The 30-y eased 2.2 bps. Money markets see 60% of an April rate hike and are moving in the direction of cumulative 75 bps hikes by eoy. EUR/USD closed the day higher (1.1589 from 1.145). The move already started before the ECB policy decision and continued afterward, but was at least partially driven by easing oil prices intraday as well.
Markets this morning are pondering comments from Israel (PM Netanyahu) that it would refrain from more attacks in Iranian energy facilities. Still, Brent oil holds near $108 p/b. Asian equities show a mixed picture. US equity futures are trading marginally lower. So no euphory at all. With respect to ECB policy several policy makers (Kazaks, Muller, Nagel) in comments this morning put the spotlights on the April meeting as key in the ECB decision making process. Nagel concludes that the ECB will need to hike rates in April if the price outlook sours.
News & Views
The Czech National Bank kept its policy rate unchanged at 3.5% yesterday in a unanimous decision. According to the Monetary Department’s updated forecast, which partly incorporates higher oil prices, headline inflation will be below 2% this year and very close to the inflation target next year. However, core inflation will remain elevated in the quarters ahead. The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as balanced overall with current impact of the Middle East conflict not jeopardizing the persistence of the low-inflation environment. The CNB adds that monetary policy is currently still relatively tight compared to the past and deems it necessary to stick to that course. CNB Michl at the press conference said that the central bank isn’t looking at market bets on rates and keeps all options open for future decisions. Ahead of the Iran war, officials saw some room to lower interest rates. The Czech 2y swap rate initially followed global market moves higher as bond markets repositioned for more hawkish central bank functions. It gave up part of the gains after the CNB meeting but still ended around 12 bps higher on the day to close at 4.09%.
White sugar prices hit their highest level since October yesterday as effects from the Middle East conflict broaden out. The de facto closure of the Strait of Hormuz is causing trouble as it is the major trading route for delivering raw sugar to refineries that convert it into white sugar. Other factors in play or lower output coming from India and Brazil’s production mix. Higher oil prices could incentivize sugar mills to divert more cane into ethanol, weighing further on global supply.
 in comments this morning put the spotlights on the April meeting as key in the ECB decision making process. Nagel concludes that the ECB will need to hike rates in April if the price outlook sours.){kind=link}