US-Iran talks end without agreement

The US and Iran ended talks in Pakistan without an agreement, with Donald Trump subsequently posting that the US navy will immediately “begin the process of blockading” the Strait of Hormuz,  putting last week’s ceasefire at risk and raising doubts about a permanent end to the war. The reaction in markets is predictable albeit relatively restrained so far. Oil prices have jumped (Brent crude is back above $100 p/b), bond yields are higher, and equity markets are lower (Japan’s Nikkei index is off around 1% overnight). In FX, the dollar is a touch firmer. EURUSD and GBPUSD are trading at around $1.1680 and $1.34 respectively this morning, having closed on Friday almost 2 cents higher on the week at $1.1725 and $1.3460 respectively, with EURGBP little changed at just over £0.87. Looking to the week ahead, it is relatively quiet on the economic data front, while the IMF and World Bank hold their annual spring meetings in Washington from today through Saturday. The latter will see a large number of central bank policymakers speak at various scheduled events over the course of the week, which will be of added interest ahead of the next round of monetary policy meetings at the end of this month.

German and UK bond yields backed up further on Friday, with 2-and 10-year yields increasing by 6-8bps, though they ended off their intra-week highs reached just ahead of last Tuesday’s ceasefire announcement, while US yields rose by 2-4bps on the day. Equity markets had something of a mixed session on Friday, but US and European stocks still chalked up solid gains of 3-4% over the week as a whole.

The impact of higher energy prices was clearly evident in Friday’s CPI data in the US. Headline inflation accelerated to 3.3% in March from 2.4% in February, driven by a sharp jump in retail gasoline prices, which rose by 21% on the month. Core inflation, which excludes energy and food prices, was little changed, nudging up to 2.6% (from 2.5% in February) with core goods inflation and core services inflation both a touch higher (at 1.2% and 3% respectively). Higher energy prices also weighed on consumer confidence this month according to the University of Michigan’s sentiment index, which fell by almost 6 points to a new record low in April.

For the week ahead, as mentioned, the IMF/World Bank meetings should attract plenty of attention. In terms of economic data, releases of note include producer prices and industrial production in the US on Tuesday and Thursday respectively; Euro area industrial production on Wednesday; and GDP for February in the UK on Thursday. The IMF publishes its World Economic Outlook tomorrow (Tuesday), while the Fed releases its latest Beige Book on Wednesday ahead of its next monetary policy meeting towards the end of this month.