It’s only been a little over three trading days but markets are evidently fearful of inflation pressures returning to major economies. Even if not fully reflected in central bank pricing, in which the needle has definitely moved, then at least take caution from the bond market. 10-year Treasury yields are up 16 bps since the end of last week, keeping around 4.11% today.
With oil prices staying underpinned and the Strait of Hormuz under de facto closure, market players will slowly have to factor this short-term spike in price pressures a lot more in the weeks ahead.
It’s sort of a repeat of the whole Russia-Ukraine conflict again, only with more uncertainty as to how long the disruption here might be. It could end as soon as tomorrow or perhaps drag on for a few more weeks. And that’s the key issue that traders and investors have to grapple with right now.
All that being said, Danske Bank is arguing that the US-Iran conflict is not likely to lead to an inflation shock or sorts. Or at least one that will cause a material shift in major central bank outlook for this year:
“In our baseline, we do not foresee that the conflict in Middle East would trigger a new inflation shock.
In the euro area, inflation has surprised to the upside lately, and due to higher energy prices in the short-term, we have upgraded our inflation forecasts. Still, we see a high threshold for central banks to react to the recent rise in inflation expectations. We still expect the ECB to stay put until the end of 2027.
For the Fed, we pencil in rate cuts in June and in September. And while geopolitics will most likely dominate headlines in the coming weeks, note that the tariff debate might also return to the agenda at some point. It is possible that the US’ trading partners will seek better deals now that the legal base of Trump’s tariff policies has been questioned.”
