Oil prices remain elevated
Oil prices remain elevated notwithstanding the International Energy Agency’s announcement that member countries had agreed to release a record 400m barrels of oil reserves. Brent crude rose by 5% yesterday, and is higher again this morning at over $96 per barrel, amid continuing attacks on shipping vessels in the Gulf. Concerns about the inflationary consequences of higher oil prices, and the potential response of central banks, contributed to a spike in government bond yields, which closed yesterday at their highest levels since the war began. In FX, the dollar remains on the front foot. EURUSD and GBPUSD have fallen to around $1.1550 and $1.3390 respectively, the former not far off its lows for the week so far of circa $1.1510 on Monday. The pound continues to nudge higher against the euro and at £0.8625 is now just shy of its best levels in 2026 to date (of about £0.8610 reached in early February).
Government bond yields rose quite sharply as the market reassessed the outlook for central bank interest rates in light of continuing high energy prices. US yields rose by 6-9 bps, German yields by 5-12bps, and UK yields by 12-14bps, with the biggest increases for all three occurring at the short-end of the curve. There’s no let up this morning with yields heading further north at the start of play. Equity markets were under pressure, but held in fairly well all things considered, with the Stoxx Europe 600 shedding just over 0.5% and the S&P 500 ending broadly flat on the day. European stocks are on the back foot again this morning though, down around 1% at the open.
ECB members say they are closely monitoring developments in energy prices and are ready to respond to upside risks to the inflation outlook. In this regard, the head of the German central bank, Nagel, warned that “if it becomes apparent that the current energy price increases will translate into broad consumer price inflation, the Governing Council will act decisively in a timely manner,” while also saying that, for now, he backs “a wait-and-see approach” as far as interest rates are concerned.
Yesterday’s US inflation data for February, which precede developments in the Middle East, were relatively benign. Headline and core inflation were in line with expectations – and unchanged from January – at 2.4% and 2.5% respectively. Core goods inflation nudged lower again last month to 1%, down from a recent peak of 1.5% in September, while core services inflation was unchanged at 2.9%.
It is another quiet day ahead in terms of economic data. The main releases are in the US and include the regular weekly jobless claims, housing starts and building permits for January, and the trade balance, also for January.