Markets
The inherently fragile ceasefire between the United States and Iran has been severely weakened by yesterday’s skirmishes in the Persian Gulf, but it still holds. US Defense Secretary Hegseth detailed Operation Freedom in a press conference today, describing it as a defensive and temporary mission to open the vital Strait of Hormuz, and adding that while the US is alert and prepared, it is not “looking for a fight.” Monday’s developments pushed Brent crude towards the $115 barrier. Prices are down a bit today to around $112. From a broader perspective, the current actual level of oil prices is probably not the worrying part. On a closing basis, it has yet to surpass the pre-ceasefire peak of just under $120. But what is changing is that markets are becoming increasingly concerned about the long-term prospects of the conflict ending. There are non-linear consequences associated with the duration of supply disruptions (oil, fertiliser, helium, liquefied natural gas…) in terms of the time it takes for normalization and inflation. The Brent crude futures curve shifts upward over the course of the week, with financial markets, for example, now quoting a price of at least $100 until September of this year.
Markets move at the pace set by oil, so we see core bond yields correcting slightly below yesterday’s high due to the slight decline in Brent crude today. Bond yields change by -4 basis points to +0.6 basis points in a sharp upward move. Net daily changes in the US range between -0.8 (30 years) and -1.4 basis points (2 years). It tells us how long-term maturities barely respond, highlighting the presence of risk premiums. The yield on 30-year US bonds is stable at 5%, while the German version is about to reach its highest levels in 15 years. UK markets were closed yesterday for Labor Day and are now catching up. Gold yields rose by 10-12 basis points. The UK 30-year yield reached its highest level since 1998. European stock markets are recouping some of their 2% losses at the start of the week with gains rising to 1.4% (EuroStoxx50). US stocks opened between 0.2 and 1% higher. Forex markets walk on water. The EUR/USD pair stabilized during the day around the 1.17 level. The same is true for the trade-weighted dollar index, which is around 98.5. The yen is among the few that show some volatility. Conclusions should be drawn with caution given that Japanese markets are closed until Wednesday. Last week’s interventions (as reported) are being rolled back for the third day in a row. The USD/JPY pair reached a two-month low at 156.6 but has recovered in the last two trading sessions and is currently at 157.8.
The March JOLTS report and the April US Services ISM report were perhaps the only significant events from a market perspective today. The headline number was printed in line with expectations at 53.6. The component of new orders fell more than expected from 60.6 in March to 53.5 while the unemployment gauge improved to a contractionary level of 48. Prices paid held steady at a 4-year high of 70.7, defying prospects of a rise to 73.5. March JOLTS job openings of 6.8 million were in line with year-to-date readings. Both the US dollar and yields ignored this result.
News and opinions
The Swiss Statistical Office reported today that the country’s headline inflation in April accelerated to 0.3% m/m, 0.6% m/m and 0.6% m/m (from 0.2% m/m and 0.3% m/m in March). The monthly rise is due to factors including higher prices of gasoline, diesel and heating oil. Air transportation prices have also increased, as have international holiday packages. Core inflation was unchanged on a monthly basis, and fell to 0.3% on an annual basis from 0.4%. Domestic products inflation in particular (-0.1% m/m, 0.5% y/y) remains very modest which is also reflected in lower services inflation (0.1% m/m, 1.1% y/y). Prices of imported goods accelerated further to 1.5% on a monthly basis and 0.9% on a yearly basis (from 1.8% on a monthly basis and -0.3% on a yearly basis). Commodity price deflation is gradually coming to an end (0.6% m/m and -0.2% y/y from -0.7% y/y). With inflation remaining at the bottom of the 0-2% range, the SNB could feel comfortable keeping interest rates at 0%. Rising risk aversion in the franc led to EUR/CHF testing the 0.90 area in early March. Strong warnings of SNB intervention (and perhaps the actual Swiss franc will be confirmed) kept the franc stable in the 0.915/0.925 trading range over the previous month.
Romania’s minority government led by Ili Bulugan was overthrown after a vote of confidence supported by the far-right nationalist AUR (Alliance for the Unity of Romanians) and the Social Democrats (PSD). The latter left the ranking last month due to disagreement with some austerity measures introduced by Prime Minister Bulogan to address the 7.65% budget deficit (2025). The reforms were a condition for the country to receive additional funds from the European Union. The country now faces a (potentially long) period of political uncertainty, as it may not be clear for the president to bring together parties able/willing to form a majority in a divided parliament. The Romanian leu is trading at 5.217, near its lowest level ever against the euro. 10-year local government bonds show a yield of close to 7.25%.
