Iran Headline Roulette Still Grabs Most Market Attention

Markets

More ECB members spoke on the sidelines of the IMF/Worldbank annual spring event in Washington. In general, it stands out how the overall tone of comments softened as oil prices moved from crisis levels (>$100/b) to more bearable levels ($90-$100 area). Leaning toward an April hold seems to be the base case as things stand. ECB Kazaks put it plain and simple: he has nothing against (market) bets on two rate hikes starting in June. He doesn’t rule out April if second-round effects emerge (in the data). “Is it April or is it June? We have proved that we can move very quickly and sizably. So we’ll see.” He notices that higher yields (and some tightening of financial conditions) are doing part of the adjustment for the ECB. German BuBa president Nagel has a slightly different view. He says that and April move hinges on the Strait of Hormuz situation. Who knows what will happen in two weeks time? Just look at who quick the tables have turned over the past week. If anything, Nagel stressed that there can be no doubt that the central bank will deliver on its price stability mandate. Vigilance is warranted. On the bright side, (medium-term) inflation expectations look well anchored at the moment. Outgoing French central banker Villeroy, a more dovish profile, thinks that a focus on April would be premature. He makes a difference between a focus on the possible spillover effects on lasting inflation while also monitoring negative effects on demand and growth. By April, he suggests that the ECB won’t have the necessary critical mass of data on the twofold effect to act. Before the April 30 ECB gathering, the central bank gets monthly PMI numbers, the ECB’s consumer survey (inflation expectations), April CPI and Q1 GDP. The latter two reports are on ECB day. It’s doubtful whether this complex already provides the “sufficient” amount of evidence. Like ECB Kazaks, Villeroy points out that core CPI (in the March reading) remained limited. ECB Schnabel, the most hawkish of them all, suggested not to rush into a decision. The ECB is in a relatively favorable position, affording it to take the time that is needed in order to analyze the character of the energy shock. She’s afraid for fragile inflation expectations, but believes that weaker aggregate demand (in any case way less strong than in 2022) could slow the overall pass-through in the economy. EMU money markets currently fully discount a June rate hike, but reduced the probability of April action to 20%.

The Iran headline roulette still grabs most market attention. Gossip on an extension of the cease-fire and fresh talks between the US and Iran somewhere next week are the underlying narrative. In the meantime, the US sticks with its naval blockade of Hormuz, keeping Brent prices at $95/b. Yesterday’s stoic moves in European trading hint at some signs of fatigue. Risk sentiment in US trading was still bullish though with Nasdaq (+1.5%) outperforming and sending EUR/USD above 1.18.

News & Views

China’s economy grew by 5% y/y in Q1 of this year, marginally better than the 4.8% expected. The 1.3% quarterly pace was the quickest since 2024Q4. Looking into the accompanying monthly economic update, growth was mainly driven by the manufacturing sector. Industrial production in March rose 5.7% y/y and 6.1% YTD y/y. This compares to retail sales growth – a proxy for services & domestic demand – of 1.7% y/y and 2.4% YTD y/y. For all of the trade and geopolitical uncertainty and despite an external environment described by the National Bureau of Statistics as “severe”, China’s industrial/exporting sector is cooping well. But Iran risks loom with hampered oil supply potentially leading to broader supply chain disruption. Trade data earlier this week already showed exports having slumped over the course of March, be it from an exceptionally strong February. Other monthly data included fixed assets growth at 1.7% YTD y/y in March, marginally easing from 1.8% the month before. The property malaise continues with investments falling by 11.2% YTD y/y and residential property sales barely recovering to -18.5% YTD y/y from a 1.5 year low of -21.8% in February. The data didn’t leave a dent in USD/CNY with the pair holding steady around multiyear lows (CNY highs) of 6.818.

Australian employment grew by 17.9k in March, building on February’s 49.7k. Growth was driven by full-time employment (52.5k) with part-time jobs being shed (34.6k). The unemployment rate remained steady at 4.3%, whilst the participation rate fell by 0.1 ppt to 66.8%. Employment-to-population stayed at 64%. Total hours worked was up 0.5%. The 0.4% rise for full-timers was supported by the 0.5% rise in the number of people employed. However, despite the 0.7% drop in the number employed, part-timers worked 0.6% more hours. This meant that part-timers had worked 1.4% more hours last month than they did in February. The Australian dollar extended its geopolitically-driven bull run this morning after the data with AUD/USD taking a shot at 0.72. That’s the strongest level since mid-2022.