Re-escalation of Iran War sees oil move higher again
President Trump said Iran ‘would pay the price’ for slow peace talks, and there were further US strikes on Iran as Trump promised to ‘hit Iran hard again’. That drove oil higher again. A barrel of Brent crude had fallen to around $90/barrel when a peace deal looked near a few days ago, but it rose 2% yesterday back to $93, and the volatile situation could see further moves today. EURUSD also had a volatile day, with the single currency rising to above $1.1570 briefly before settling back to $1.1540. Similarly, sterling got back above $1.34, but is now back to $1.3380, and EURGBP is still very range-bound and trading around 86.3p.
Modest moves in bond markets. US yields initially ticked down following US CPI data. The data was more or less in line with expectations, but yields moved down slightly. However, the news of renewed hostilities between Iran and the US saw that reverse, and yields were up slightly on the day. US 10-year yields were up 1bps to 4.55%. The deterioration of the situation hit European yields, with rises, particularly at the short end of the curve. 2-year Bund yields were up 5bps to 2.7% and 10-year up 3bps to 3.07%. The rout in tech stocks continued with further falls in tech and semiconductor stocks as the sell-off that started last week continued. The S&P was down 1.6% for the day and off 4.5% since its peak last week. The NASDAQ fared worse and is down 2% yesterday and 7% from last week’s high point. There was a more modest fall in Europe, with the Eurostoxx down 0.7% yesterday and the FTSE up 0.3%.
Oil prices rose globally with Brent up to around $93/barrel while WTI got back to over $90. The EIA (Energy Information Administration) weekly report showed another large decline in US stockpiles, at 7.23mn barrels last week, much bigger than the 2mn expected. However, the report also noted that global oil demand is falling by more than 1mn barrels a day, offsetting some of the disruption caused by the Iran war.
US CPI in May was more or less in line with expectations. Year-on-year CPI increased by 4.2%, up from 3.8% in April, and in line with forecasts. Core CPI came in at 2.9%, again in line with forecasts, but the monthly increase was a bit softer at 0.2%, a little under expectations. The 4.2% headline print is a 3-year high and is outpacing the increase in wages, meaning real incomes are being squeezed. Inflation is very much being driven by energy, unsurprisingly. Gas prices also accounted for more than half of the monthly gain from April. Food prices are also climbing, at the fastest pace in almost four years. There was a limited market impact, as the data was in line with forecasts, and the strong payrolls data had already brought forward pricing for a first Fed hike to December, with the chance of that first hike coming in October edging up to 70%.
On the agenda today, we will have the ECB meeting conclusion and rate decision. A 25bps increase taking the deposit rate to 2.25% is a virtual certainty, with the market fully pricing it in. Comments from a range of ECB members have been hawkish, with, amongst others, Nagel saying a June hike was needed ‘unless the outlook improves markedly’ and Elderson saying it was ‘increasingly unlikely’ the ECB can look through the inflation shock. There will be updated staff projections after the meeting, with inflation expected to be revised materially higher for this year and growth forecasts cut. President Lagarde’s statements will be closely watched to see when the next hike may come. Markets are pricing in September, but July is an option, though unlikely, but Lagarde’s comments may provide a clearer guide.