Week of 23 March

Last week, most major central banks announced rate decisions, generally striking a more hawkish tone amid inflationary pressures from oil prices, but markets reacted mainly to developments in the Middle East. Brent started the week at just over $100 per barrel, spiked to almost $120, but fell back to under $110 by Friday. Gold tumbled below $4,550 an ounce before recovering above $4,700 towards the end of the week.

A much calmer financial calendar awaits in the coming week, with events such as the UK CPI, flash PMIs and Japan inflation reading likely to be overshadowed by developments in the Middle East.

Week in Review

At the start of the week, the market's main focus was on geopolitics, as a high-level meeting between Chinese and US officials gave positive signs but no definitive agreements. The Strait of Hormuz was in focus, as a few ships managed to pass, while Iran offered different options for non-US/Israeli-aligned shipping. The US struck military targets on Kharg Island, from where 90% of Iran's crude is shipped, while Iran attacked a key UAE port that was allowing some crude to bypass the Strait. Crude initially rose, with gold barely over $5,000 per ounce at the start of the week, as investors worried that higher prices would force up interest rates. US President Donald Trump delayed a planned meeting with Chinese President Xi Jinping by a month (originally scheduled for the end of March), suggesting that the war in the Middle East could last several more weeks.

Markets fell midweek amid an escalation in the war, as Israel attacked Iran's South Pars gas field, and Iran retaliated by attacking Qatar's LNG facilities. Iran also launched attacks at Saudi Arabia's Red Sea port of Yanbu, which is allowing up to 2.5 million barrels per day of Gulf crude to get around the Strait of Hormuz. Brent jumped to almost $120 per barrel, while gold cratered to just over $4,700 per ounce. The Fed kept rates unchanged as expected, but the updated dot-plot matrix showed a substantial reduction in the number of votes in favour of easing in what was seen as a "hawkish hold". Fed Chair Jerome Powell expressed frustration with persistently high inflation, while the staff projections raised the outlook for GDP growth.

Crude settled down heading towards the weekend as the US and Israel tried to signal a de-escalation, with Israel promising not to strike Iran's energy infrastructure. Qatar said the attacks on its LNG facilities reduced capacity by 17% and that recovery would take several years. Markets showed optimism after Israeli PM Benjamin Netanyahu said that the war would be over "sooner than people think", while reports suggested that Iran was allowing a growing number of non-US-aligned ships to transit the Strait of Hormuz through its territorial waters.

Another hawkish hold came from the ECB, which emphasised inflation risks from rising oil prices. The bank also released new economic forecasts, which included higher inflation estimates and wider ranges in case the war in the Middle East drags on. Following the meeting, numerous ECB officials gave press statements, with the hawkish German representative, Joachim Nagel, notably stating that the ECB could hike in April if price conditions warrant it. Markets priced in two rate hikes by the end of the year.

The BOE voted unanimously to keep rates unchanged, sending a strong hawkish signal, citing rising inflation risks. The message from the BOE left markets pricing two rate hikes by the end of the year as gilt prices hit a one-year high.

The BOJ also delivered a hawkish hold, with one dissenter voting to hike. The market assessed the statement and BOJ governor Kazuo Ueda's post-rate-decision rhetoric, focusing on the effects of oil prices, as hawkish, allowing USD/JPY to retreat from the 160 key level.

The RBA delivered a dovish hike, with an unusually narrow 5-4 vote split. Governor Bullock said that rising fuel prices were not the reason for the hike, and that the "lively" discussion was about timing, not the direction of policy.

Super Micro Computer shares plummeted after market on Thursday after the US charged the co-founder with helping to smuggle banned servers into China.

Biggest Market Movers

• The dollar suffered its first weekly decline amid a generalised hawkish shift among global central banks..
• Gold declined substantially as the Fed signalled less easing and continued demand for liquidity.
• Crude prices swung widely on news from the Middle East, with the gap between WTI and Brent widening to almost $20 at one point.
• NZD best-performing of the major currencies, aided by a weaker greenback and expectations that the RBNZ could hike as soon as April.
• Stoxx 50 headed for its third consecutive week of losses, and is down YTD.

Top Events in the Week Ahead

The coming week is very light in terms of expected economic events, with UK and Japanese inflation data the highlight, though likely less relevant given that the BOE and BOJ held meetings recently. Market activity is likely to hinge on developments in the war with Iran, which could make the flash PMI figures more relevant this time around. They include partial surveys conducted after the war in the Middle East started and could provide some advanced insight into how businesses and the economy are reacting to higher energy costs.

Flash PMIs: First Check of the War

The first insight into the effects of the war on key major global economies comes on Tuesday with flash March PMI data. Japan is the first to disclose its figures and is expected to remain in expansion at 51.3 despite disruptions to fuel supplies. Another key economy is Germany, with the focus on the manufacturing PMI, which is also expected to remain in expansion at 50.7. The Eurozone composite PMI is anticipated to improve to 52.0 from 51.9, but by the bare minimum. Meanwhile, the UK manufacturing PMI is projected to dip to 51.1 from 51.7.

Japan Feb Inflation Cooling

Also on Tuesday, Japan will release its February CPI figure, with the headline number expected to decline to 1.3% from 1.5%, reflecting lower food prices. But the BOJ warned that inflation is projected to rise back toward its 2% target later this year and adopted a hawkish tone amid anticipated increases in energy prices. Japan's core inflation rate is expected to tick up to 2.1% from 2.0%, as strength in the yen relies on markets believing inflation will rebound and keeping the BOJ poised to hike.  If the yen continues to strengthen, USDJPY could decline to 157.64, then to 156. On the upside, 160 remains a strong resistance for now.

UK CPI Staying Elevated

The UK will publish its February CPI figures on Wednesday, but markets might look past the trend as they factor in inflationary pressure from higher energy prices. However, the reading could provide a baseline to factor in the effects of the war, so an unexpectedly large drop in CPI could give the BOE some room before hiking rates. The consensus is for headline CPI to dip to 2.8% from 3.0%, ironically aided by lower energy prices. Core inflation is anticipated at 2.9%, down from 3.1% a month earlier. On Friday, UK retail sales are expected to have come to a screeching halt in February, at 0.1% compared to 1.8% in January, potentially signalling further economic trouble for Britain even before the war. Cable faces resistance at 1.3470, but another spike higher could reopen 1.36. On the downside, support remains at 1.32, with a breakdown exposing 1.31.

Other Events and Earnings

Monday has Eurozone flash consumer confidence data. Tuesday includes the US ADP employment change. Australia's monthly inflation comes out on Wednesday. For Thursday, German GfK consumer confidence data is expected. Friday sees the University of Michigan consumer sentiment index. A very quiet corporate earnings calendar shows financial updates from the likes of GameStop, PSS Holdings, Carnival, Fevertree, Kingfisher, Crest Nicholson, and Next.