By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Markets struck a marginally calmer note yesterday, though geopolitical developments remained front and centre, and will again be in pole position today, with a busy US data slate mattering little in the grand scheme of things.
WHERE WE STAND – At real risk of tempting fate, I’m going to say that yesterday felt just a touch calmer on the whole, at least compared to some of the mayhem that we’ve seen in recent days.
That said, conflict continues in the Middle East, and the Strait of Hormuz is still essentially impassable, with Brent having ticked back above the $100bbl mark overnight. While the IEA have, finally, agreed to a 400mln bbl stockpile release, this is more of a ‘sticking plaster’ than anything else, given that you’re replacing a flow with a stock. Regardless, it’s a positive at the margin, while we also had another round of relatively positive comments from President Trump yesterday, who again stated his belief that the war will end ‘soon’ and that there is ‘practically nothing left to target’ in Iran.
That is, of course, rhetoric that we’ve heard before from Trump, with the market probably wanting to see ‘action’ rather than ‘words’ when it comes to potential de-escalation at this stage.
Besides that, we had a few ECB policymakers (Kazimir & Kazaks) doing an unwanted Trichet tribute act, as well as possibly the most inconsequential US CPI print ever.
On the former, with both suggesting that a rate hike could be on the cards as soon as the April meeting, I’d love to know what they’re smoking, given that tightening policy into a significant demand shock is basically the definition of a policy mistake. For what it’s worth, while the hawks are annoyingly vocal, I see essentially no chance of the ECB hiking rates this year, and would be fading the hawkish repricing in EUR STIRs that we’ve seen of late.
As for the latter, headline CPI rose 2.4% YoY last month, while core prices rose 2.5% YoY, both being unchanged from the pace seen in January. This doesn’t matter at all, though, not only as the FOMC increasingly lean into the employment side of the dual mandate, but also considering that the commodity price shock stemming from ongoing conflict in the Middle East which will clearly put upwards pressure on headline inflation metrics over coming months.
Anyway, markets didn’t do much yesterday, and given how hectic the last week or so has been, I shan’t write here just for the sake of it. Cautious tones seem likely to prevail for the time being, and are doing so this morning, though there are increasing signs – judging by yesterday’s price action – that participants are continuing to try and front-run what many see as an inevitable right-tail outcome, and U-turn away from kinetic action in the Middle East.
With there still being a general desire not to get ‘caught short’, there is hence a natural desire not only to shrug-off any headlines regarding ongoing conflict, but also to front-run any potential signs of ‘good news’, especially when waiting for complete clarity on the ‘good news’ front would probably lead to it being far too late to get a position on. I’d expect this to remain the prevailing dynamic in coming sessions.
LOOK AHEAD – I know I’m saying this every day, but data really doesn’t matter right now.
As such, markets are pretty much certain to ignore the weekly US jobless claims stats that we get today, along with last month’s housing starts and building permits figures, with all eyes remaining squarely focused on geopolitical events. The same goes for the 30-year Treasury bond sale due later on, though it is worth bearing in mind that neither the 3- nor the 10-year auction has been especially auspicious this week, auguring somewhat poorly for the auction due later today.
