There are high hopes this week sees some concrete agreement between the US and Iran about a longer-term ceasefire and crucially, the opening of the Strait of Hormuz. Crude oil prices have front run this and fallen more than 20% over recent weeks, and that has brought down government bond yields and some of the excessive pricing of rate hikes in the months ahead, as inflation risks modestly ease. There’s only now around a coin flip chance of one Fed rate hike by year-end, down from above 60% one week ago. This certainly has room to fall further – let’s not forget, there was a 20% chance of a rate cut before the conflict – especially with the supposed new Fed Chair being a dove. We’d likely initially need to see a sharp pick-up in Hormuz traffic, which would cause the dollar to break out of its recent range.
Aside from geopolitics, we get top tier hard macro data releases in the days ahead, with eurozone inflation and the usual monthly US employment report on the first Friday of the month. Â Non-farm payrolls will be scoured for any inflationary impulses with an inline print keeping the three-month average consistent with balance between labour demand and supply. Interestingly, most economists now estimate that the current breakeven pace of job creation is no higher than 10k per month, meaning even a modest reading should be sufficient to keep the unemployment rate from rising further.
Obviously, eurozone inflation will be a key input for the ECB meeting in a couple of weeks’ time. Metrics from France, Germany, Italy and Spain point to a headline figure broadly in-line or slightly cooler than the prior. Crucially, the transmission of price pressures from energy to broader areas of the economy – ‘second-round’ effects – remains relatively contained. That said, another 3.0% headline annual print, or even a slight moderation, will not divert the narrative from an ECB hike soon. The bank is still likely to go through with an ‘insurance’ rate hike, even as it battles stagflation and then the rising risk of a policy mistake.