By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Risk appetite waned once more yesterday amid an apparent escalation in the ongoing Middle East conflict as energy infrastructure begun to be targeted, while the FOMC stood pat as expected. Today, decisions from the BoE, ECB, and others are in focus.
WHERE WE STAND – We will come to yesterday’s central bank announcements in a moment, but geopolitical developments remain ‘front and centre’ for markets at large.
After a couple of days where participants had adopted a relatively sanguine, and in hindsight complacent, tone to goings-on in the Middle East, yesterday brought something of a reality check, amid reports of Israeli strikes on Iranian oil and gas facilities. Not only does this mark a notable escalation in and of itself, with energy infrastructure thus far having largely been left alone, but Iranian threats to retaliate with strikes on a host of energy facilities in the Gulf further increase the risks associated with such action.
Consequently, markets reached once again for the risk-off playbook that we’ve seen so often of late – bidding up crude benchmarks, buying the USD as the only haven that works in the current environment, selling Govvies across DM curves on higher n/t inflation expectations, trimming down exposure to equities across the board, and selling precious metals too as the complex continues to trade more like a risk asset than anything else.
I suppose all this serves as a bit of a wake-up call for the market, which had been becoming increasingly desensitised to incoming geopolitical news flow, as so often tends to be the case in a scenario such as this. Despite that, it remains the case that there is, as of yet, little sign of any ‘off ramps’ being taken, while the Strait of Hormuz is still essentially impassable. In light of that, I see it as prudent to continue to adopt a relatively cautious tone as far as risk assets are concerned, for the time being, while seeking shelter in the relative safety of the greenback. That said, I remain of the view that what we are seeing geopolitically is more likely to amount to short-term turbulence, as opposed to marking a longer-run bearish turning point.
Anyway, time to get our teeth into those central bank decisions.
The FOMC, as expected, maintained the target range for the fed funds rate at 3.50% – 3.75%, with only Governor Miran dissenting in favour of a 25bp cut. The accompanying policy statement was little changed from last time out, besides noting explicitly that the implications of developments in the Middle East are ‘uncertain’. Meanwhile, the SEP nudged higher near-term inflation expectations, while still seeing a return to the 2% target by the end of the forecast horizon, while also pencilling in marginally faster growth both this year, and next.
At the presser, Powell gave little away, not pre-committing to any particular rate path, while also noting a need to balance risks to each side of the dual mandate, and ensure inflation expectations remain well-anchored. Powell also confirmed that he has no intention of leaving the Fed Board until the ongoing DoJ investigation is ‘well and truly over’, but has not yet made a decision whether to remain after that has concluded.
On the whole, I’d say we learned relatively little from the FOMC confab, perhaps unsurprisingly so, with Powell & Co seeking to remain noncommittal given the hugely fluid macroeconomic backdrop. Still, it seems likely that the Fed will largely ‘look-through’ any temporary energy-induced inflation, particularly given the fragile balance that the labour market is currently in, meaning I’m happy to still pencil in two 25bp cuts in the second half of the year.
As for other policy decisions, the BoC also stood pat, and adopted a ‘wait and see’ approach, with the statement noting a readiness to ‘respond as needed’ as the economy evolves moving forwards. Overnight, the BoJ also held their policy rate steady, at 0.75%, while as expected reiterating that further tightening is on the cards if the economy continues to evolve in line with expectations.
LOOK AHEAD – Even as geopolitical events continue to dominate, the central bank bonanza continues today.
This morning, both the SNB and Riksbank are set to stand pat, holding rates at 0.00% and 1.75% respectively, with both likely adopting a ‘wait and see’ approach given ongoing geopolitical uncertainty. The SNB’s comments on the CHF, though, will be of interest, not least given that policymakers have in recent weeks stated a greater willingness to intervene to prevent too significant an appreciation in the currency.
After that, focus will turn to Threadneedle Street, with the Bank of England also set to stand pat, maintaining Bank Rate at 3.75%, in what is likely to be a 7-2 vote among MPC members. The ‘Old Lady’ is also likely to remove the explicit easing bias from the accompanying policy statement, though will probably seek to ‘play for time’ to some degree, referring heavily to the April Monetary Policy Report, by which stage policymakers would hope to have greater clarity on the magnitude, and duration, of the energy price shock.
Once the BoE is out of the way, it will be the ECB’s turn to take centre stage. Lagarde & Co are set to maintain the deposit rate at 2.00%, with the statement likely to reiterate a ‘data-dependent’ and ‘meeting-by-meeting approach to future policy decisions. That said, the statement will likely make reference to not only the huge degree of prevailing geopolitical uncertainty, but also upside risks to the near-term inflation outlook. Still, President Lagarde is unlikely to explicitly lean into any particular rate path at the post-meeting presser, especially not the idea of rate hikes, instead repeating that no ‘pre-commitment’ is being made to a certain course moving forwards.
Besides all that, we have jobs data from the UK this morning; jobless claims figures stateside at lunchtime, where the initial claims print coincides with the March NFP survey week; and, last but not least, earnings from FedEx, a traditional bellwether stock.
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