Ahead Today
G3: US PCE inflation, durable goods orders, University of Michigan sentiment index, JOLTs job openings
Asia: Thailand international reserves, India exports
Market Highlights
With oil prices hovering near USD100/bbl, markets remain firmly in a risk off mood. Iran has struck oil tankers near Iraq and Kuwait, while maritime security in the region remains highly fragile, with three commercial vessels hit while attempting to transit the Strait of Hormuz. The supply gap from Hormuz disruptions is simply too large to be easily replaced, given limited alternative routes. While the IEA’s planned release of emergency oil reserves may provide some temporary relief, it is unlikely to offset sustained supply risks. Naval escorts appear impractical, and US backed maritime insurance offers little comfort against the risk of direct Iranian attacks.
On the US macro front, PCE inflation due later today is expected to show inflation remaining sticky, still well above the Fed’s target and hovering around the 3% mark. The oil price shock adds to upside inflation risks and complicates the Fed’s policy outlook. Our estimates suggest that every USD10/bbl increase in oil prices could add roughly 0.2pp to US inflation. At around USD100/bbl oil, headline inflation could rise by close to 0.8ppt, while in a USD150/bbl scenario, inflation risks pushing decisively above 4%. Reflecting these risks, markets have sharply pared back expectations for Fed rate cuts this year, with easing expectations fading further as the US Iran conflict persists.
Regional FX
Higher oil prices are tightening policy constraints across the region through higher inflation and weaker current account dynamics, given that most Asian economies are net oil importers. Markets are pricing in a tightening bias to varying degrees across several regional central banks. Term premia also appear to be rebuilding, reflecting geopolitically driven energy price shocks. At the same time, a potential delay in Fed easing in response to the oil shock is likely to provide near term support for the US dollar, keeping Asian FX on the defensive. Ultimately, the duration of the US Iran conflict remains critical for global markets, as the persistence of oil price pressures will depend on whether supply disruptions prove temporary or more prolonged.