Equities soared this week and risk-sensitive currencies rallied following the Middle East ceasefire, as Brent oil futures (June) fell almost 14% to 4-week lows below $95/bbl. This is still a significant premium to its $60-70 trading range through January and February ahead of the conflict, reflecting uncertainty over how flows through the Strait of Hormuz will now unfold during the next couple of weeks. The largest equity gains came in Asia (net oil importers), while the US and Europe rallied for the second consecutive week. Higher oil prices are starting to impact inflation figures; however, hawkish expectations for rate hikes continue to ease.
US inflation rose 0.9%m/m in March (as expected) as fuel prices recorded a record increase of 21.2%m/m. That drove the annual rate from 2.4% to 3.3% (highest since May-24), though markets expected a 3.4% figure. However, there was little sign of a broader spillover into prices as core CPI undershot expectations at 0.2%m/m (vs 0.3%), firming from 2.5% to 2.6%yr (vs 2.7%). The conflict ceasefire allowed markets to begin repricing Fed easing this year, with the CPI figures then giving it a further nudge, currently sitting at around 10bps of cuts. The FOMC minutes from the March meeting indicated the Committee would be patient in cutting rates amid the energy shock pushing inflation higher; however, consumers are clearly feeling the strain. Consumption data in February was weak - personal spending was softer than expected at 0.5%/m (nominal) and 0.1%m/m (real) - while the University Michigan Sentiment index fell to a record low (47.6) in March.
In Europe and the UK, final PMI reads for March confirmed cooling growth and upside risks to inflation from higher energy prices. The euro area index (50.7) registered a 10-month low and the UK's posted its weakest expansion in 6 months. Amid energy and supply disruptions, firms were facing higher input costs while order books and confidence were also suffering. Rate hike pricing has pared back in both regions this week, though markets still lean towards the ECB and BoE raising rates by year-end.
Lacklustre Australian household spending data ahead of the fuel price shock and back-to-back rate hikes has cast doubt over the RBA's excess demand narrative. Spending in February was only able to post a 0.3% rise, matching January's modest gain - on track for its softest quarter since the second half of 2024 (reviewed here). Annual growth was little changed at a 4.6%yr, a level pace with growth in both discretionary and non-discretionary categories - though there has been a strong leaning towards services spending (6.2%) over goods (3.1%).
