Markets
Markets today are essentially doing what they have been doing for the past two months: waiting for the next batch of headlines about the war between the United States and Iran. Some particularly concrete news about opening the Strait of Hormuz (or failure to do so) would help in making an estimate/guess about the impact on prices and activity in the short to medium term. Whatever the outcome of this process, this estimation will remain a complex exercise, both for markets and central bankers. Even if a political solution/opening of the strait is reached in the “near future,” the question will remain to what extent and how quickly oil and other commodities will return. We may/likely have already passed the point where some of the spillover and second-round inflation effects have affected the economic chain anyway. In this scenario, (some) central banks will still have to adjust their policies, especially if fears of a slowdown in activity turn out to be more modest than feared. Right now, this is not just “hypothetical thinking.” The United States and Iran are said to be considering a short-term memorandum aimed at ending hostilities and resolving the issue of the (mutual) closure of the Strait of Hormuz. Other key issues, including Iran’s nuclear programme, will need to be addressed in the talks over the coming months. Yesterday the markets saw enough signals (especially from President Trump’s call) to expect a positive outcome. Inflation and other risk premiums fell significantly. It is easy to maintain, and even extend, this gain today, as the waiting game continues. Brent crude oil is making a new attempt to settle below $100 per barrel (currently $97). EMU swap yields still fall between 4 (2 years) and 2.5 (30 years). Markets trimmed expectations for the European Central Bank to raise interest rates. The next move is only fully discounted for July (70% in June), and markets see little more than one additional move towards the end of the year. US yields also fell in a similar move between 3 basis points (2 years) and 1 basis point (30 years). Financial markets still take a largely neutral view on whether the Fed’s next move should be to raise or lower interest rates. Data (US) in the current context mostly has limited impact on the market. However, first-quarter initial labor costs in the US fell more than expected (2.3% from 4.6%). Meanwhile, weekly unemployment claims remained very low. (200 thousand). Focus now turns to the US April payrolls report tomorrow. UK markets are now joining the broader ‘accommodative’ rally (3.5-2.5 basis points lower yield) as investors eye any potential impact today’s regional elections will have on Prime Minister Starmer’s position (and on fiscal policy). US and EMU stock indices mostly hold yesterday’s gains, with limited and mixed moves today. The dollar falls further. There are some technical support levels nearby, but not yet actually challenged (US Dollar Index at 97.85 with recent lows near 97.63; EUR/USD at 1.175 with wartime highs of 1.1849). Minimum intraday movements in the ERU/GBP cross rate as well (0.864)
News and opinions
The Norwegian Central Bank surprised by raising interest rates by 25 basis points to 4.25% today. Although she said in March that such a move would be appropriate “at one of the upcoming meetings,” not everyone assumed it would actually be at the next meeting this month. The decision was driven by high and above-target inflation, higher energy and commodity prices in general as well as higher wage growth while the economy is operating near capacity with higher energy prices at least partially offsetting its negative economic impact. “Rising inflation over time can lead businesses and households to plan for persistently higher inflation. It may then become difficult to bring inflation down again.” Norway’s central bank responded by tightening policy further and sticking to its March guidance that forecast interest rates would rise to 4.5% this year. Norwegian swap yields briefly rose by several basis points, bucking the broader trend, but failed to hold on to those gains. The value of the Norwegian krone rises to 10.85 euros / Norwegian krone.
In contrast, the interest rate in Sweden remained at 1.75%, and is expected to remain at this level during the coming period. The Riksbank has provided a dual risk assessment. Primary energy-related inflation could lead to a widespread and sustained rise in other goods and services, calling for possible tightening of monetary policy. The risks of this happening have increased compared to the March meeting. Meanwhile, the already slowing economy performed weaker than expected, and inflation came in well below expectations. Yesterday’s headline figure fell to 0.8%, the lowest since December 2020 while the underlying gauge showed prices stagnating for the first time in three decades. This means “there is room to wait until there is a clearer picture of the effects of the war and the supply shocks it entails,” the Riksbank said. The Swedish Krona ignored the decision with little change in the EUR/SEK pair trading around the 10.83 level.
