Markets were left to weigh the daylight that exists between the US and Iran, leaving the Strait of Hormuz under its existing chokehold. With the conflict about to enter its 5th week, Trump's initial 4-6 week timeline is coming into focus - the White House maintaining the operation is ahead of Schedule as Iran put forward demands of its own. Brent crude dipped below $100/bbl this week on hopes for a ceasefire, but negotiations remain a long way from delivering that outcome - let alone reopening the Strait. US equities remained under pressure, while weak Treasury auctions put upward pressure on yields. Ongoing uncertainty has returned a safe-haven bid to the USD, weighing on the local AUD.
In Australia, a speech from Assistant Governor Kent reinforcing the RBA's hawkish stance to the energy shock kept pricing for two further rate hikes this year supported. Meanwhile, markets effectively consigned some encouraging signs on inflation on the eve of the conflict to the history books. Speaking to an audience of market participants, Kent said the economic conditions and upturn in inflation since September last year had indicated that financial conditions were less restrictive than previously thought, necessitating the rate hikes in February and March.
The conflict was framed by Kent as a supply shock that added additional risks to the inflation outlook and to inflation expectations the longer it persisted. The tone was very much reflective of the hawkish majority on the Monetary Policy Board following last week's split (5-4) decision. February's inflation data surprised to the downside as headline CPI eased unexpectedly from 3.8% to 3.7%yr while the trimmed mean or core rate held at 3.3%yr (reviewed here). Declining petrol prices ahead of the conflict were taking some heat out of the CPI basket, while underlying prices were at least stabilising.
At the ECB Watchers Conference, President Lagarde said the current dynamics were different to the energy shock following in the Ukraine war in 2022: so far, the energy price surge was much less severe, demand conditions were currently weaker, and monetary and fiscal policy were now more neutral rather than stimulatory. Additionally, inflation has been around the ECB's target over the past year. Overall, Lagarde indicated the ECB will adopt a measured approach, but that tighter policy could be an option if inflation became expected to deviate 'significantly and persistently from target'.
Market pricing in the UK remained strongly hawkish, implying 3 rate hikes this year. That reflects comments from BoE Chief Economist Pill that the uncertainty brought about by the shock was not a reason for policy inaction. Comments from other BoE members were more nuanced. Policy hawk Greene said there were greater downside risks to the economy in hiking now than in the previous tightening cycle in 2022, while the dovish member Taylor called for holding rates steady until greater clarity over the economic effects from the energy shock became evident.
