Market optimism on a reopening of the Strait of Hormuz has (temporarily at least) been validated, with Iran agreeing to allow the passage of commercial vessels. This applies for the 10-day ceasefire in Lebanon (to around April 22), though it is a firm step towards de-escalation that markets have priced in. Front month crude oil futures fell to around $85/bbl (lows since March 10) to close the week. Equities continued to climb ahead of the reopening announcement - and a little more after it - sending the US to record highs, while Europe was not far below its own peaks. The Australian dollar led advances against the USD and rates repriced dovishly.
The Fed's Beige Book for April noted that activity across most US districts expanded at a 'slight to modest' rate. Amid the uncertainty associated with the conflict, the survey picked up that many firms were taking a wait-and-see approach, holding off from hiring, pricing and investment decisions. Higher prices for energy and fuel (as well as other inputs such as freight and fertiliser) were compressing profit margins. Employment levels were described as 'steady to slightly up', citing no discernable AI-related impacts.
Policymakers from the BoE and ECB attending the IMF meetings in Washington delivered plenty of headlines. Governor Bailey from the BoE again pushed back on market pricing for multiple rate hikes saying the UK economy was experiencing a 'very big energy shock' and that the best approach was to avoid rushing into judgements on what the appropriate response was. BoE Chief Economist takes a notably more hawkish stance, openly criticising this more patient approach. For the ECB, President Lagarde's comments were similarly aligned to Bailey's, highlighting a preference to proceed with a cautious and data-dependent approach. Executive Member Schnabel said the ECB was well placed having previously returned inflation to the 2% target without causing a recession. While considered a hawk, Schnabel said that the energy price shock will hit growth and weaken the ability of firms to pass through higher input costs to households.
A solid Australian labour force report for March kept markets pricing in a high probability (around 70%) of a third consecutive 25bps rate hike in May. Comments from RBA Deputy Governor Hauser this week were also a factor. However, the confidence measures in the Westpac-MI consumer sentiment report (April) and the NAB Business Survey (March) have collapsed amid the current situation, highlighting risks for an RBA tightening into an uncertain outlook.
Labour market tightness has been central to the RBA's hiking cycle, a narrative broadly reaffirmed by the March report as the unemployment rate held steady at 4.3%, matching expectations. A slight reduction in the participation rate to 66.8% allowed modest jobs growth of 17.9k (20k expected) to absorb the inflow of workers to the labour force (reviewed here).
Speaking in the US this week, the RBA's Hauser said the fuel crisis added to the list of supply shocks that were pushing up inflation while weighing on growth. In that backdrop, while the RBA seems to want to hike further - especially if it sees signs that inflation expectations are moving up - he said there was a judgment call to make around the extent to which slower growth would help to ease capacity and inflationary pressures.
