Bonds and stocks slide

Markets took their cue from higher oil prices with bond yields rising sharply and stocks selling off sharply during yesterday’s session. Perhaps with an eye on markets, Donald Trump has announced a ten-day extension to his ‘freeze’ on striking Iran’s power plants, saying talks with the country were going ‘very well’. Notably though, this has done nothing so far to stem the rise in oil prices, with Brent crude higher again overnight at almost $110 a barrel. The price action in FX was muted enough yesterday with the dollar marginally firmer once again. EURUSD and GBPUSD are trading at around $1.1520 and $1.3315 respectively this morning, leaving them both down around half a cent on the week to date, while EURGBP continues to hug the £0.8650 level.

Government bonds yields backed up as central bank rate hike expectations firmed in tandem with the rise in oil prices, with US, German and UK 2- and 10-year yields across increasing by 10-13bps. The market is currently pricing in a bit more than three quarter-point rate hikes from both the ECB and Bank of England this year and about a 70% chance of a 25bps hike from the Fed. Equities sold off sharply with US and European stocks shedding between 1.5% and 2.5% on the day.

 The OECD says the conflict in the Middle East “will test the resilience of the global economy”, noting that “the breadth and duration of the conflict are very uncertain, but a prolonged period of higher energy prices will add markedly to business costs and raise consumer price inflation, with adverse consequences for growth.” It has lowered its forecasts for Euro area and UK GDP growth this year to 0.8% and 0.7% respectively (from 1.2% for both in its previous projections in December) and raised its projections for inflation to 2.6% and 4% (from 1.9% and 2.5%).

 Bank of England MPC member Breeden says “second-round effects” on inflation from higher energy prices “should be less likely (given) there’s slack in the labour market and the outlook for economic activity was lacklustre, even before the energy shock,” meaning “that firms and workers are likely to have less pricing power, less wage bargaining power.” Still, she says the MPC remains “alert” and will “learn a chunk more by the time of the April (interest rate) decision” about the risks to inflation.

 Consumer confidence in the UK slipped to an eleven-month low in March according to the GfK indicator published overnight, with the survey noting that “people simply do not feel the economy is robust enough to ride out the knock-on effects from the Middle East conflict.”  Separately, retail sales volumes fell by 0.4% in February (the month before the conflict), albeit following a sizeable gain of 2% in January. Over the three months to February, sales rose by 0.7% from the three months to November and were up 3% on the corresponding period a year ago.

 It is a quiet end to the week in terms of economic data. The ECB publishes the results of its February survey of consumers short- and medium-term inflation expectations, while the University of Michigan publishes the final reading for US consumer confidence in March (sentiment fell in the early part of this month and may have declined further since). A few Fed members are scheduled to speak today also.