Aurelia Butler

LONDON (Reuters) – Reports of an Israeli attack on Iranian soil that possibly drags the Middle East into a deeper conflict has jolted world markets with geopolitical risks that can swiftly change the direction of anything from oil to bonds and renew inflation risks. Stocks tumbled on Friday, oil briefly jumped more than $3 a barrel and safe-haven government bonds rallied. Moves were relatively modest, but the heightened tensions inject fresh uncertainty and fuels concern that high oil prices and potential supply disruptions will keep inflation high.”Even though these look to be more benign, telegraphed moves between Iran and Israel, and it is not the base case that we get a wider conflict, you probably do need to price in more of a risk premia,” said Tim Graf, head of macro strategy for Europe at State Street (NYSE:STT) Global Markets.Here’s a look at the key takeaways for markets. 1/ OH OILOil prices are up roughly 13% so far this year near $90 a barrel and seen staying high. The International Monetary Fund on Tuesday described an “adverse scenario” in which a Middle East escalation leads to a 15% jump in oil and higher shipping costs that would hike global inflation by about 0.7 percentage point.Oil supply tightness, and higher prices, have been underpinned by oil producing group OPEC and other big oil producers curbing output.Morgan Stanley has lifted its third quarter Brent crude oil forecast to $94. “A geopolitical risk premium appears to have been built in to the oil price, but, clearly, further escalation presents further upside risks,” said Thomas McGarrity, head of equities at RBC Wealth Management.2/ INFLATION ROUND TWOSpooked by latest hot U.S. inflation numbers, investors are watching oil. It was an energy price surge two years ago that helped drive inflation and rates higher.High oil prices threaten the downward move in inflation and could prompt a further reassessment of bets on global rate cuts.A key market gauge of long-term euro zone inflation expectations, which generally tracks oil, on Tuesday hit its highest since December at 2.39%. It remains above the European Central Bank’s 2% inflation target. The ECB has said it is “very attentive” to the impact of oil, which can hurt economic growth and boost inflation.3/ GO ENERGY STOCKS Energy stocks are a winner from higher oil prices. The S&P 500 oil index and European oil and gas stocks hit record highs earlier in April before pulling back.U.S. oil stocks have jumped almost 12% so far this year, outperforming the broader S&P 500’s 5% gain. Yardeni Research recommends an “overweight” position on energy stocks, seeing a rise in Brent crude to $100 in coming weeks as a possibility.Oil briefly spiked to around $139 after Russia invaded Ukraine in 2022, its highest since 2008. “The rise in oil prices complicates central banks’ efforts to bring inflation back down to target levels,” said RBC’s McGarrity. “Having exposure to the energy sector arguably provides the best hedge to both inflation and geopolitical risks in equity portfolios near term.”4/ SAFE-HAVEN RUSH Demand for safe-havens such as U.S. or German bonds — especially before the weekend — trumps the urge to sell bonds given renewed inflation risks from rising oil for now.U.S. 10-year Treasury yields fell as much as 15 basis points on Friday and were last down 6.5 bps at 4.58%, down from recent five-month highs. “That suggests markets are more concerned about the need for safe havens than the immediate inflationary implications of higher energy prices,” said Investec chief economist Philip Shaw.The dollar and Swiss franc have also benefited from safe-haven demand, with geopolitics and high oil prices seen adding to a dollar rally fueled by a scaling back of U.S. rate cut bets.Dollar strength exacerbates pressure on economies such as Japan grappling with a yen at 34-year lows, with traders nervy over possible central bank intervention.ING currency analyst Francesco Pesole said a further Middle East escalation could see losses for currencies in New Zealand, Australia, Sweden and Norway as risk sentiment takes a hit; the Swiss franc could rally further.5/ FRESH EM PAINRising oil prices and a strong dollar also hurts emerging markets, such as India and Turkey, that are net oil importers.India’s rupee hit record lows this week. Even for Nigeria and Angola, typically Africa’s largest oil exporters, weakening local currencies and rising fuel prices have hit government coffers due to capped gasoline pump prices and a lack of local oil refining.”A return to $100+ in oil prices may convince the Fed to throw in the towel on hopes of monetary easing for now, and a potentially magnified impact across EM currencies of geopolitical risk would fuel a substantial rotation back to the dollar,” said Pesole. More

(Reuters) – Republican presidential candidate Donald Trump is using his hush money trial to squeeze his loyal army of small donors and personally lobby major backers as he scrambles to reduce a major fundraising disadvantage with Democratic President Joe Biden.His campaign has been firing off daily, dramatically worded fundraising appeals to small donors – who rallied to support him when he was first charged in the case last year – since the trial in New York began with jury selection on Monday.”I could be locked up for life,” one email read this week. “I should be campaigning across America and fighting for our country. But instead, I’m stuck in Biden’s corrupt court AGAIN,” read another, although Trump is being tried in New York state court by the Manhattan district attorney and not by the Biden administration. He faces up to four years in prison if convicted, although many of those who have been convicted of that crime in the past have faced punishments like probation and fines.There are early warning signs that Trump’s small-donor base may be flagging, suggesting Trump may have to rely more heavily on major donors ahead of the Nov. 5 rematch against Biden. The biggest fundraising group collecting money for his campaign – known as the Trump Save America Joint Fundraising Committee – reported on Monday that it raised $33.6 million in the first quarter from donors who gave $200 or less. That was about $17 million less than the amount raised from small donors at the same point in the 2020 election cycle by Trump’s main fundraising group at the time, the Trump Make America Great Again Committee, according to a Reuters review of disclosures filed to the Federal Election Commission. Small donors have historically been crucial funders of Trump’s presidential campaigns, and last year they helped Trump raise $13 million in donations in the week after his indictment in the New York case.But, after initial fundraising spikes off the back of early court appearances last year, donations have slowed as charges accumulated in more cases. A degree of “Trump fatigue” appears to have set in after nine years of the former real estate tycoon blasting out near-daily overtures for cash, said Zachary Albert, a politics professor at Brandeis University who has studied small donors. “He’s been fairly unscrupulous in his appeals,” said Albert. “The norm is to treat these small donors as cash cows that you squeeze as much as you can, as often as you can.”Still, Albert expects an uptick in donations during the trial as the campaign seeks to capitalize on supporters’ sentiment that Trump is being unfairly tried.The Trump campaign did not respond to a request for details on its fundraising strategy. It is due on Saturday to report on its finances through March. Trump’s campaign reported raising $10.9 million February, well below the $21.3 million that Biden’s reported raising. DONOR CALLS, BIG FUNDRAISERSGiven Biden’s financial advantage and Trump’s spiraling legal costs, Trump is increasingly focused on landing big checks. The Republican candidate is ratcheting up donor events, placing calls to benefactors on the fence and tapping a money-raising operation that has merged with the Republican National Committee, according to three people briefed on the activity. “The donors I’ve needed him to talk to, he’s been exceedingly effective in terms of getting large checks and support from them,” said one Trump fundraiser, who asked to remain anonymous to share private conversations. In the last two weeks, Trump has held fundraisers in Georgia and Florida. The campaign aims to raise at least $5 million from each event, although it has settled for less, one of the sources said. An April 6 fundraiser at hedge fund manager John Paulson’s Palm Beach home, which Trump’s campaign said raised more than $50 million, attracted heavy-hitter co-hosts including hedge-fund investor Robert Mercer (NASDAQ:MERC) and his daughter and conservative activist Rebekah, investor Scott Bessent, and casino mogul Phil Ruffin. Some longtime Republican donors remain reticent to back Trump, however, often citing what they see as his erratic personality or the Jan. 6 attack on the U.S. Capitol by his supporters as their main stumbling points. Several told Reuters they are holding back out of concerns about their donations going to Trump’s mushrooming legal fees.A fundraising group run by Trump has spent more than $55 million on legal bills since the start of 2023. So far, the political contributions paying Trump’s legal bills have largely come from small donors.Another Republican donor said he was comfortable backing Trump again but first wanted to understand what strategy the RNC had to win in battleground states. One fundraiser said Trump’s legal problems, which include four criminal cases, had had the opposite effect on some donors, prompting some to reach for their checkbooks.”These trials are the catalyst of phone calls,” said George Glass, a retired businessman who was Trump’s ambassador to Portugal.In a sign of how the trial is affecting Trump’s fundraising outreach, Trump this week called in from New York to Florida to speak during a meeting of the Rockbridge Network, a low-profile but influential group of conservative donors, according to a source. More

There’s a peculiar practice in financial markets: expressing shock when economic data don’t match forecasts that few had faith in the first place. It’s happening right now with US inflation. Last week’s core CPI growth for March came in at a 0.359 per cent month-on-month, against a consensus of 0.3. A ‘whopping’ 0.059 percentage points higher. Cue frantic re-pricing of expected US Fed rate cuts for 2024.Admittedly, it was the third consecutive above-expectation reading. So it’s entirely reasonable to think the Fed’s stance on three rate cuts for 2024 may change (Powell suggested as much on Tuesday). But it feels a bit flawed to base rate reconsiderations — pricing from 3 cuts to 1 or no cuts — on a series of missed inflation forecasts that few had confidence in anyway. Best to understand why it came in higher than expected first.The chart below shows the contributions of various components to annual US CPI inflation. Shelter (housing) has been a driving factor, and to a lesser extent, transport. Both were behind the surprises in the month-on-month data across January, February and March. They help make up the sticky services component.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Digging further — shelter is itself driven by “Owners’ Equivalent Rent of Residences”. This is the BLS’ estimate of what owner-occupiers would pay if they rented their homes. It gets a chunky 34 per cent weight in core CPI (which excludes food and energy). Motor vehicle insurance is driving the transport services bar.So what? Calculations of OER are dubious (it is imputed based on rents for comparable rental housing). The EU HICP and UK’s CPI measures — which the ECB and BoE target, respectively — exclude it. As Andrew Hunter, US economist at Capital Economics put it: Much of the debate on inflation across developed markets right now is being driven by comparing apples to oranges.(There could be another problem: circularity. Moody’s chief economist Mark Zandi argues that housing supply is being constrained by tight monetary policy, which pushes up rents and therefore OER. Also, higher insurance claim costs — which may itself be due to inflation — can push up premiums. But that’s for another time.)Anyway, the Fed targets PCE inflation. That measure places less emphasis on OER (core PCE gives it only a 13 per cent weight). It also measures insurance inflation net of claims. Below is annual US inflation on a CPI, HICP and PCE basis. As you can see, measures with less emphasis on OER are a lot closer to target. And there’s a headline you don’t see: US inflation is actually the same as in the eurozone (when comparing like for like)But surely CPI still reflects the price growth US household feel? True, to an extent. But, as UBS Global Wealth Management chief economist Paul Donovan says: “Because OER is completely made up, the true the cost of living for a homeowner is more benign than headline CPI would have us believe”. (Many market players already know this, but it can still cause volatility).Even if you’re still wedded to CPI, it should come down. OER tends to lag private indicators of rent — see the chart below. Insurance also operates on rolling contracts. Right now, auto insurers are perhaps pushing up premiums to make up for higher post-pandemic costs. Both should settle, but it will require patience.Bottom line: the CPI is noisy right now. It makes sense to focus on PCE to get a better handle on underlying inflation pressures, which is what should matter to the Fed anyway. As Donovan at UBS points out:The Fed seems to be caught in a bit of a trap at the moment. It elevated the importance of CPI as a measure back in mid 2022, despite traditionally favouring PCE. That makes it difficult to be cutting rates when headline CPI is 3.5 per cent.The dispersion of price pressures in the PCE is now being driven by a narrow portion of the index (mainly shelter, and other supply-driven inflation factors). The spread between increasing and decreasing elements of the index is now running below its historic average.Does that mean Powell’s turnaround midweek is a mistake? To answer that, it is worth assessing PCE’s overall direction of travel. The producer price index reflects price pressures within the supply chain, and is a decent leading indicator of the prices households end up facing. Annual PPI growth for final demand goods is now back in line with its historic range. Barring any further supply chain snags or energy shocks, PCE goods should be well behaved. As for the labour market, Goldman Sachs has compared several measures of tightness. The average z-score — a statistical measure which relates a single data point to the mean of a group of values — across all measures is essentially back to pre-pandemic levels. This suggests pressures on wages ought to continue easing. Indeed’s latest tracker shows annual growth in posted wages is back down to 2019 levels. That means the services component of core PCE should ease further too.Pulling this together, the disinflation narrative appears alive and well for PCE. Pressures in good, services and shelter (food and energy are less of a problem now) are abating, or already have. But to be complete, there may be a political incentive for cuts too, notes State Street Global Advisors, which is now considered a contrarian for still backing rate cuts. The Fed may ideally want to make cuts before the US election campaigning really kicks off, given the optics. The asset manager also cites cracks in America’s growth story despite aggregate resilience on the surface — which Alphaville and Free Lunch have also emphasised recently — such as rising debt delinquencies, rapidly declining SME hiring expectations, and the fact that the mean perceived probability of losing one’s job in the next 12 months is now above pre-pandemic levels according to the NY Fed Survey. ..In summary:— The market’s recent re-pricing is partly based on data realities, but also impatience, an overemphasis on headline CPI, and panic.-The disinflation narrative remains alive and well. Current stickiness is driven by idiosyncratic factors, including measurement differences.-The Fed’s emphasis on data dependence has tied its hands. It is finding it hard to ignore the run of three above expectation CPI prints, despite the detail, forward dynamics, and PCE all looking benign.-Given how restrictive real rates are, pockets of economic weakness and where underlying inflation is — excluding all the noise — the Fed probably still needs to cut rates.Still, given Powell’s midweek comments the Fed looks more likely to cut later, and potentially by less this year. More

Stay informed with free updatesSimply sign up to the More

Stay informed with free updatesSimply sign up to the More