Sunset Market Commentary

Markets

US President Trump this time seems to stand with his 8pm ET deadline to deliver a fatal blow against Iran (hitting energy facilities & infrastructure) unless the country cedes to his demands. On Truth Social he posted that “a whole civilization will die tonight, never to be brought back again. I don’t want that to happen, but it probably will”. Almost simultaneously, vice-president JD Vance at a press conference In Budapest suggested that “very shortly, this war will come to an end”. He hinted at two pathways to the end game, one of which is some sort of last-minute deal, the other being forceful military action. In the meantime, both the US and Israel stepped up pressure by striking more than 50 targets on Kharg Island, Iran’s oil export hub. Iran also rejected the temporary ceasefire offer put forward by intermediaries with threats to close the straight of Bab-El-Manbab (Red Sea) via proxies as well. Brent crude holds near the (June) contract high of $110/b. Several European and UK markets return from the long Easter break with interest rate markets doing so in bear flattening fashion. German yields add 2.5 bps (30-yr) to 7 bps (2-yr) with UK yields currently 5 bps higher at the front end of the curve. Central bank comments include ECB Wunsch in an interview with the WSJ. He doesn’t want to exclude an April rate hike: “We need to move at some point to control the indirect effects. So the focus will be on what’s our view over the medium term and it’s still an uncertain view.” He admitted that the ECB responded too slowly to the previous energy supply shock (2022) which is something to draw lessons from. That basically boils it down to April or June. He plotted two scenarios for the ECB. “Either this crisis ends quite soon and you know if we hike then we can probably undo that after a while. Or, this crisis is going to last and then the first hike will only be the first hike of probably a series.” Interestingly, he said that we need some demand destruction, although he linked that in first instance to avoiding fiscal stimulus to dampen the blow from rising energy prices. ECB Radev said that the likelihood of the more adverse scenario has increased, but doesn’t know if the ECB will have enough data by April to potentially pull the trigger on interest rates. During the Easter weekend, ECB Villeroy suggested that we’re closer to the adverse than to the baseline scenario. At the March ECB’s watcher conference, ECB President Lagarde hinted at some measured adjustment of policy if the energy shock gives rose to a large though not-too-persistent of overshoot of the inflation target. Agility is key so inaction isn’t interpreted as not willing to act. US Treasuries outperform today, but they ceded more ground especially just ahead of the Easter break (after strong payrolls). Today’s weekly ADP employment data continue to point at a strengthening labour market while (outdated) February core durable goods orders surprised positively (though after a January downward revision). The dollar (EUR/USD 1.1565) and stock markets (-0.5%) trade more stoic going into tonight’s deadline.

News & Views

Czech CPI inflation printed at 0.6%% M/M and 1.9% Y/Y in March (from -0.1% M/M and 1.4% in February). Energy prices rose 5.3% M/M reducing the decline compared to the previous year from -7.8% in February to -1.7% Y/Y. Services inflation rose 0.3% M/M and 4.7% Y/Y. Goods inflation accelerated to 0.8% M/M raising the yearly figure to 0.1% Y/Y from -0.7% previously. Headline inflation still holding below the CNB’s 2% target probably leaves the central bank time to assess how much the (energy) price shock from the conflict in the Middle East will filter though toward the rest of the economy. In the Minutes of the March meeting, the CNB analyzed that it was necessary to keep policy tight, not underestimate the cost of the current energy shock and that it remains prepared to respond in case of risks to a further rise in core inflation. At the same time, there was a consensus that the external shock occurred in a context of low inflation and relatively high interest rates. This provides a buffer for absorbing the shock and makes it premature to already consider raising rates. Despite the wait-and-see mode, markets currently still discount gradual rate hikes by the CNB (approximately 50 bps to near 4%) towards the turn of the year.

A survey of the German IFO institute showed that business climate in the German Automotive industry deteriorated somewhat in March. The indicator fell to minus 18.7 down from minus 15.7 points in February as companies assessed their current business situation as considerably worse. However, at the same time companies raised their expectations as they saw an improvement both for the backlog of orders and export orders. Companies also expect job cuts to slow down in coming months. IFO even assessed that “the decline in new jobs, which could be observed since 2022, seems to have come to a halt”.