Markets
The fog of war thickens as we’ve entered the US’s initial 4-to-6 weeks timeline to achieve its military goals in Iran. Only yesterday, US President Trump indicated that the US is in serious discussions with the (new) regime in Iran, but that it can still destroy Iranian energy infrastructure if the Strait of Hormuz isn’t immediately open for business. This morning, the WSJ reports that Trump told aides he’s willing to end the war without reopening the Strait of Hormuz as such operation could extend the total war timeline easily by another 4-to-6 weeks. Recall that the same WSJ yesterday headlined that a ground invasion to extract Iran’s uranium was under consideration. The FT focused on the possibility of seizing the strategic Khargh island (oil export hub). Add into the mix this weekend arrival of the USS Tripoli and the 31st Marine Expeditionary Unit, Houthi involvement (Red Sea is key trade choke point), continuous US/Israeli bombing and targeted Iranian retaliation (eg Kuwaiti oil tanker off Dubai overnight) and it remains anyone’s guess whether the Gulf War is about to escalate or de-escalate.
Brent crude trading at $113.5/b this morning is indicative to lack of confidence in an off-ramp. Key US equity indices (S&P & Nasdaq) eventually closed at new sell-off lows despite a slightly better start. Volatility on fixed income markets remains elevated with core bonds coming off the lows. Hawkish repositioning went far enough for now to navigate through the current fog. US Fed Chair Powell yesterday laid out the case for patience in case of the Federal Reserve. By pushing against the “emergency” rate hike case, he helped US Treasuries during their intraday rally. The US yield curve eventually bull steepened with yields ending 5.3 bps (30-yr) to 8.3 bps (2 to 7-yr) lower. Powell did warn for the impact on inflation expectations: “You can have a series of these supply shocks and that can lead the public generally—businesses, price setters, households—to start expecting higher inflation over time. Why wouldn’t they?” In FX space, the dollar gained for a fifty consecutive session. The trade-weighted greenback is bumping heavily against the 100.25/50 resistance area which is the neckline of a multiple bottom formation. A weekly close above this zone would be technically very relevant and strengthen the case for further USD-gains. EUR/USD keeps drifting lower, closing below 1.15 yesterday for only the third time this year and the sixth time since the start of H2 2025. Today’s eco calendar contains EMU CPI inflation, US Chicago PMI, consumer confidence and JOLTS job openings. Our in-house nowcast model sees headline inflation rising from 1.9% Y/Y to 2.5% Y/Y, slightly less than the consensus estimate (2.6%). We expect today’s numbers to be of limited importance as the market still navigates from the one Iran-related headline to the other.
News & Views
Inflation in Japan’s capital cooled to the slowest pace in almost two years in March. Consumer prices in Tokyo rose 1.4%, decelerating from an downwardly revised 1.5%. The gauge excluding fresh food ticked lower to 1.7% from 1.8%. Energy subsidies explained much of the easing with overall prices falling 7.5%. Gas prices, however, only dropped 1% compared to a whopping 14.7% decline in February in what are most likely spillover effects from the Iran war. The inflation measure excluding fresh food & energy costs still came in at an elevated 2.6% (from 2.7%). The currently higher oil and gas prices are expected to add further upward inflation pressure in coming months. Additional yen weakness adds fuel to the fire. USD/JPY in recent days soared to the 160 mark compared with 156 at the beginning of March. It prompted again strong verbal warnings from the Ministry of Finance yesterday. The Japanese currency today barely trades stronger around USD/JPY 159.6.
The British Retail Consortium warned UK consumers that price increases are inbound. Goods prices sold in the UK rose by just 1.2% in March, slightly higher than the 1.1% seen in February. But that relatively benign price evolution is to be upended in the short-term as energy costs surge and the broader supply chain disruption triggered by the conflict in the Middle East are working their way through. BRC said it will take at least three months before the effect passes through to consumer prices with retailers first working with suppliers to try to mitigate the impact on prices as far as possible. The BRC data were collected between March 1 and March 7. Brent oil since the cut-off date has risen another 20%+.
 eventually closed at new sell-off lows despite a slightly better start. Volatility on fixed income markets remains elevated with core bonds coming off the lows. Hawkish repositioning went far enough for now to navigate through the current fog.){kind=link}