Markets
Markets yesterday were looking for a new short-term equilibrium/new starting point as a next phase in the Middle East conflict had started. Earlier this week markets were pushed back and forth by consecutive U-turns as the war between the US and Iran unfolded. The ceasefire announced Wednesday morning avoided an outright escalation and triggered an impressive relieve short-squeeze. However, markets soon realized that reaching a sustained military & political solution faces multiple high hurdles. With Iran only allowing minimal, highly selective and strictly controlled passage through the Strait of Hormuz any relieve to supply disruptions (and price pressure) is probably hard to imagine. Israel agreeing to hold talks with Lebanon intraday eased overall market ‘hesitation’ to some extent. After Wednesday’s sharp decline, Brent oil yesterday rebounded to the $97 p/b area. This also triggered a partial reversal of Wednesday’s easing on interest rate markets. German yields rose between 2.8 bps (2-y) and 5.9 bps (30-y) with similar moves visible in the UK as markets try get further insight in the ECB’s and the BoE’s reaction function. Moves in US yields again were more modest with yields easing between 2.6 bps (5-y) and -0.2 bps (30-y). With policy still slightly above neutral, the US central bank still has some more room to maneuver with the March inflation data to be published today a first post-war reality check. A $22 bln US 30-y Treasury Bond sale tailed slightly and only met mediocre investor interest even as the yield (4.876%) was the highest monthly result since July. Equities took a breather after Wednesday’s aggressive squeeze higher (EuroStoxx 50 -0.29%; S&P 500 +0.62%). The dollar stayed on the backfoot. DXY closed at 98.8 from an open near 99.15. EUR/USD closed near 1.17. The yen still underperforms (USD/JPY close just below 159).
Asian equities this morning mostly hold a constructive bias looking forward to the US-Iran negotiations scheduled to take place in Islamabad staring tomorrow. Oil at the same time shows no clear bias (Brent $96.75). The dollar also shows no clear direction (DXY 98.9, EUR/USD 1.169, the yen still underperforms (159.3)). Aside from headlines on developments/negotiations regarding the conflict in the Middle East, US inflation data to be published today provides a first ‘hard’ evidence on the economic fall-out from the conflict. We expect US headline inflation to jump to 3.3% Y/Y (from 2.4%). The rise in core inflation for now is expected to be ‘limited‘ to 2.6% Y/Y (from 2.5%). It will be interesting to see the reaction of US markets especially in case of a higher than expected outcome. Inflation expectations measures from the U. of Michigan consumer confidence survey also deserve more than average attention.
News & Views
The Bank of Korea left its policy rate unchanged at 2.5%. The central bank kept a balanced assessment on the impact of the war in the Middle East which poses both downside growth and upside inflation risks. CPI inflation for the year is expected to considerably exceed the February forecast of 2.2%, while core inflation is also likely to be somewhat higher than the previous forecast of 2.1%. If the current shocks (energy, other commodities, supply chain disruptions) are prolonged, leading to a broadening of inflationary pressures and heightened inflation expectations, a monetary policy response is required. Departing BoK governor Rhee compared the current situation with the aftermath of the Russian invasion in Ukraine. While the economy is currently in a moderate recovery instead of facing pent-up demand, it is more vulnerable to rising inflation (expectations) because of the weaker currency and the potential for faster pass-through in prices. South Korean money markets currently discount two to three rate hikes by the BoK for this year.
The OECD’s new chief economist, Scarpetta, warned that governments that cut fuel taxes after the start of the Iran war must swiftly phase out those costly subsidies. Scarpetta said that such initiatives helped fuel inflation, store up fiscal problems and blunt incentives to cut dependence on fossil fuels. Any measures should be targeted at low-income households and energy-intensive businesses. Earlier this week, also the EC warned against turning the current energy crunch into a fiscal crisis.
. The rise in core inflation for now is expected to be ‘limited‘ to 2.6% Y/Y (from 2.5%).){kind=link}