Markets
Crude oil is front and center again. Brent crude oil is rising sharply to $109 a barrel, coming from levels around $100 and even temporarily below that amid optimism that the conflict in the Middle East may end soon. US President Trump dashed any hopes during his 19-minute speech yesterday in which he pledged to strike Iran “very hard” in the coming weeks. If Iran does not reach an agreement, the United States will begin targeting its electrical and oil facilities. The speech is seen as an escalation, rather than a clear timeline for US withdrawal. Trump’s use of strong language reveals growing frustration, including regarding the closed Strait of Hormuz. The fact that the United States is a net energy exporter helps cushion the economic blow, but since oil is a globally priced commodity, that does not make the United States immune to rising prices. Joe Sixpack is already paying $5.5 per gallon for diesel, the highest level since mid-2022. Gasoline is currently at $4.08, a similar high in four years. The sharp rise in pump prices is leaving consumers with a bad taste as they enter the midterms in November. Meanwhile, Europe is facing total shortages (for example, French petrol stations are running dry). Diesel prices rose to the equivalent of $210 per barrel. Prices peaked at around $220 shortly after the Russian invasion.
Rising oil prices are having a now-familiar effect on other core market areas. Yield curves decline as central bank bets rise on the short end of the curve, and a rising risk premium does the same for the long end. German interest rates add between 5.7 and 7 basis points. US Treasury yields add 2.6-3 basis points across the curve. Government bonds largely underperformed after doing the opposite yesterday – among other things thanks to Governor Bailey pushing back against “markets getting ahead of themselves.” UK yields rise by 7.3-9.3 basis points. The King Dollar rules caution as investors eye the Easter long weekend. Both US and European markets are closed tomorrow, and US management often uses non-trading days as an opportunity to make big moves (geopolitical, trade-related, or otherwise). The DXY is bouncing back north of the 100 mark. EUR/USD is sliding in a reversal move towards the 1.15 level but remains above the 1.15 handle. The yen is approaching the $160/JPY level again and GBP/USD risks breaking below the 1.32 support level. Risk aversion sent stocks down more than 2% in Europe and between 1.25-1.75% on Wall Street.
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Swiss inflation in March rose by 0.2% m/m and 0.3% m/m (0.6% m/m and 0.1% m/m in February), below expectations (0.5% m/m). The Swiss Statistical Office indicated that the rise was due to several factors, including higher heating oil prices and international holidays. Air transport prices also recorded an increase, as did gasoline and diesel prices. Core inflation (such as fresh and seasonal produce, energy and fuel) was unchanged (0.4% y/y). Domestic commodity prices fell by 0.2% month-on-month but rose by 0.5% year-on-year. Prices of imported goods rose by 1.8% on a monthly basis but fell by 0.3% on a yearly basis. The report currently shows only a “modest” direct increase in prices following the conflict in the Middle East. The broader impact remains to become clear later. With inflation still in the lower part of the 0% to 2% price stability band, the SNB now has room to wait and see. Markets are discounting the possibility of a roughly 75% rate hike in September. This space for the SNB to wait and strong verbal warnings about the SNB’s insistence on addressing undue CHF strength at the moment may leave the Swiss Franc in a somewhat more neutral position. The EUR/CHF pair recently rebounded from the 0.90 area mid-last month to 0.9215 currently.
Today, the Bank of England published its Committee of Decision Making data for March. This CFO survey was conducted March 6-20. Companies reported annual private price growth of 3.7% in the three months to March (from 3.8%). Special price inflation for next year was expected to reach 3.5% in the three months to March, but one-month data rose from 3.4% to 3.7%, suggesting companies are adjusting their forecasts due to recent increases in energy prices. Expectations for CPI inflation for next year accelerated by 0.5 percentage point to 3.5%. Uncertainty rose overall, with 57% of companies reporting that the overall level of uncertainty facing their business was high or very high (+10 percentage points from February). Companies achieved annual employment growth of -0.3%, down from -0.2%. Employment growth expectations for next year remained unchanged at 0.1%.
