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- It has been another week where market sentiment has been driven by headlines from the US-Iran conflict. The oil price has fluctuated around developments, falling when Iran declared the Strait of Hormuz open last Friday then rising when shipping was once again prohibited and the US moved to enforce its own blockade. Wrangling over ceasefire deadlines continued but away from commodity markets, equities remained largely untroubled. Brent Crude has drifted higher over the week and is currently trading around $106/barrel, which is close to a three-week high.
By the numbers
3.3% – UK inflation in March, up from 3.0% in February and in line with expectations. A surge in petrol prices resulted in the biggest rise in transportation costs since 2022. Core inflation eased slightly to 3.1%, below expectations. Services inflation rose to 4.5% in March from 4.3% previously.
20,000 – the number of flights Lufthansa cancelled this week from their summer flight schedule, to save jet fuel. The Financial Times reports the EU is preparing for jet fuel sharing, with the European Commission increasing the monitoring of fuel stocks and refining capacities along with the co-ordination of supplies and potential redistribution of jet fuels across the bloc. Energy commissioner Dan Jørgensen said “we are moving from a crisis that has so far been primarily a crisis of too high prices. Now, we’re moving towards a crisis of supply. This we will see first and primarily on jet fuels. We are approaching this very rapidly.”
4.9% – the UK unemployment rate in March, falling from 5.2%. The details are less positive than the headline level, with the fall in unemployment as a result of a spike in ‘economic inactivity’ rather than people finding work. Payrolls data is showing a continued fall in employment, while wage growth is still slowing. The UK labour market is in a fragile state.
Market movers
- I’m writing this while sat at Geneva airport waiting for my flight home… waiting seems to be the order of the day given that we are now in a period where peace talks between the US and Iran have slowed to a crawl. Both sides are contesting control of the Strait of Hormuz and no timeline for the ceasefire to end. Equally, central banks are waiting and observing the incoming data; with headline inflation well above target, expectations have risen for interest rate hikes this year. But central bankers have made it clear that they will be patient in shifting to a more cautious monetary policy stance. Christine Lagarde of the European Central Bank suggested a hike this month is unlikely. She said the ECB needs to “gather more information” and commented that the “double uncertainty” over both the “duration of the shock and the breadth of pass through”, compounded by the “stop-start nature of the conflict”, is making it more challenging to detail a monetary policy response to the war.
Meanwhile we heard from Kevin Warsh earlier this week in his nomination hearing before the Senate Banking Committee. Warsh has been put forward to replace Jay Powell as Federal Reserve Chair at the end of next month. Warsh pledged to be “strictly independent” on rate setting and rejected the notion he would be Trump’s “sock puppet”, adding that the President had not made him promise to lower rates. Warsh said, “the President never asked me to predetermine, commit, fix or decide on any interest rates decisions in any of our meetings… nor would I ever agree to do so”. Market expectations for Warsh’s tenure at the Fed saw heightened expectations for rate cuts over the course of the year, but these have now faded, such that the Fed is expected to be on hold for many months to come.
Central banks will likely want to digest more data, and any progress on a resolution on the Iran conflict, before deciding to raise rates. Core inflation is, so far, relatively unmoved by the spike in inflation – but if second order effects from the spike in energy prices begin to emerge, the case for rate hikes will become more compelling.
Still no sign of my gate being announced…
The investment lens
We’re starting to see the impact of the Iran war spread beyond inflation data and into wider economic surveys with data softening as the conflict impacts confidence and forecasts. With a lack of clarity over the next phase of hostilities, no signs of high-level talks and a shift from the US from constant ‘deadlines’ to an indefinite ceasefire, the risks of a more prolonged conflict with consequences for the economic outlook and market sentiment are clear.
For the moment, equity markets are still focusing on positive outcomes, indeed with limited impact to the hard economic data and the corporate earnings outlook still positive, risk appetite remains relatively untroubled.
But survey data is shifting – we have seen notable downturns in both UK and European consumer sentiment data as higher energy pricing, and fears over further cost of living pressures, weigh on consumers. Business indicators are also highlighting weakness; while US surveys remain resilient, European flash PMI data for April fell sharply, implying economic contraction in the second quarter. The data was skewed by stronger manufacturing numbers, which hinted at companies attempting to front load orders and get ahead of any potential supply chain issues later on. PMI services data showed a clearer deterioration.
A lack of meaningful progress in finding resolutions to the conflict means we appear to be in a stalemate phase. Neither the US or Iran is looking to ease their own blockades of shipping, and while it is clear that some vessels are managing to stealthily navigate the Strait of Hormuz, we are a very long way from ‘normal service’. Reports from the US Pentagon suggesting that the laying of mines in the main shipping lanes has been more extensive than previously thought also adds to risks that a return to normal will take longer than feared. The moves higher in the oil price are reflecting a view that supply will be tighter for longer. For now, bolstered by strong corporate earnings growth and a positive outlook, equities remain untroubled. But with the issues that spooked markets in March unresolved, the economic outlook is more uncertain than buoyant equity markets would suggest.
Time for me to get my flight… have a good weekend.
