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Last week, we did a quick chart post looking at how financial markets were pricing the conflagration in the Middle East. Tl;dr — it was being priced to all be over by Easter.
But a week is a long time in financial markets. So here’s an update.
We all know that spot prices for Brent crude oil have now risen by around 50 per cent since the Friday prior to Operation Epic Fury. As the days have ticked by, the prices on contracts for delivery further into the future have ticked up. And gasoline, being made of, erm, oil, has repriced too:
Gasoline futures prices give a relatively clean lead to prices at the pump across America, given the lack of European-style taxes. So, unless there are sharp falls from here, Americans can probably expect gas station prices per gallon to surpass $4 in a week or so as the pricing filters up the fractional distillation pipe:
Still, it’s the jump in natural gas prices across Europe and Asia that is probably a bigger deal for consumer inflation. When we looked last Tuesday, prices for December delivery had reached €45 per MwH compared to a pre-strike level of €32. They’re now closer to €56 per MwH. American gas prices have risen too, but the magnitude is just of a different order:
The upshot of this is that markets are still pretty chill about the impact on US inflation. But meaningfully less chill about European inflation.
US inflation swaps price CPI to come in 0.4 percentage points higher over the next year than they did on the Friday before Operation Epic Fury. Don’t get us wrong — 0.4 percentage points is a lot. But it’s not the 1.3 percentage point leap in year-ahead UK inflation expectations, or the 1.7 percentage points priced into the Italian curve.
And this has led to a repricing of the expected path of central bank rates: maybe one less cut by year-end in the US, but hikes rather than cuts across Europe.
If you’re wondering why we’ve left the Bank of Japan off this grid, it’s because it squidges up the others a bit too much. And anyway, the market pricing as to the path of expected BoJ hikes remains close to identical to the path priced on the eve of the strikes — almost to the basis point.
And so, with inflation expectations higher and cuts repriced to hikes, bond yields have shifted higher, sending prices lower.
We hope that updating charts to recalibrate what zip code we’re in when it comes to inflation expectations won’t become a weekly Alphaville feature. But we, like every other human alive, haven’t a clue as to when the war will be over and the price shock will subside. So ¯\_(ツ)_/¯
