Rates Spark: Oil losing control
The desk posits that the recent inability of USD and EUR rates to track the decline in oil prices indicates a persistent upward pressure on global rates, fueled by robust US economic data and rising inflation expectations. Per the full note from ing-think, hot US inflation readings, particularly with CPI projected to stay above 4% in May, suggest a more hawkish Fed stance which complicates the bullish narrative for rates. Current financial conditions, along with geopolitical tensions impacting oil flows, could exacerbate volatility in rates without yielding significant relief unless growth concerns intensify more substantially. This narrative appears at odds with the softer expectations emerging in some bank forecasts, given that rates remain sticky even after oil prices dipped briefly towards US$90/bbl.
What the desk is arguing
The desk's central thesis suggests that the degree to which USD and EUR rates remain unresponsive to oil price movements underscores a relentless tightening of financial conditions driven by persistent inflationary pressures. The commentary indicates that unless economic growth becomes a more pronounced concern, rates are likely to remain elevated due to the backdrop of strong US labor data and hawkish signals from the Federal Reserve.
Evidence supporting this view stems from hot US inflation readings, with CPI for May expected above 4%, traditionally indicative of a more aggressive Fed response. As noted, the robust backdrop of macro data and risk assets continues to reinforce the recent hawkish repricing of rates, as reflected in the performance of longer-end US Treasury yields, which have shown a reluctance to drop significantly even with oil prices falling.
Where it sits in our coverage
Our consensus for EUR/USD sits at 1.1600 with a range from 1.1200 to 1.2000. Specific firm targets by commerzbank and jpmorgan align at 1.1900 and 1.1800 for Mar26, respectively, reflecting an upward trajectory amid current pressures.
The desk's outlook appears well-aligned with the upper bound of the consensus spread, indicating an expectation for EUR/USD to maintain strength in light of persistent inflation and hawkish central bank guidance.
How other firms see it
Many firms, including commerzbank and jpmorgan, share a similar perspective, expecting elevated EUR/USD levels. Conversely, firms such as citi project a more bearish outlook, expecting the pair to fall closer to 1.1300 by Mar26.
The trajectory of EUR/USD likely mirrors the evolving ECB rate path in response to inflation conditions, while the dynamics in USD/JPY will also reflect Fed policy responses and the resulting rate differentials.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Persistently high US inflation is expected to push EUR and USD rates upward.
- 02Geopolitical tensions and energy costs may exacerbate financial market volatility.
- 03Market sentiment remains bullish on both USD and EUR rates despite lower oil prices.
- 04Growth concerns could be a significant catalyst in shaping future rate expectations.
Market implications
Traders should closely monitor the forthcoming US CPI release, as an unexpected spike in inflation could reinforce a hawkish Fed tone, driving USD rates higher. Furthermore, maintaining a watchful eye on geopolitical developments surrounding oil could provide insight into broader market volatility.
Risks to this view
If inflation readings begin to show substantial easing or if geopolitical tensions dissipate, particularly in oil-producing regions, we may see a reversal of the current rate outlook. A deterioration in macroeconomic indicators signaling growth concerns could also shift sentiment toward a more dovish stance, negatively impacting rates.
Articles Rates Spark: Oil losing control 07:31 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Both USD and EUR rates are struggling to follow oil lower, and hot US inflation readings today won't support a bullish case either. Unless growth becomes a bigger concern (which seems less likely given still strong US job numbers), rates may not find much relief Benjamin Schroeder and Michiel Tukker We expect US CPI for May to remain elevated, which should continue to add upward pressure to global rates Hot US inflation and still robust growth are adding upward pressure to global rates Geopolitics and oil prices are still a source of volatility for rates. But following the ratchet higher in rates on the back of the US jobs report, long-end rates have become stickier at their elevated levels even as oil briefly dipped towards US$90/bbl on Tuesday.
It might be just a growing numbness to the news cycle of supposed deals and renewed conflicts. Shortly after oil hit new lows, headlines of both Iran and US attacks pushed prices back up. But keep in mind that US rates – especially real rates – have been doing their own thing for a while given the resilient backdrop in both the macro data and risk assets overall.
A hawkish repricing of the Fed has been the result, and if we look at the upcoming CPI that is set to show a headline inflation print above 4%, it strengthens the case for the hawks. There might still be arguments to look through this inflation print, which could well mark a peak. But for now, the market has to work with the data at hand, which still points in a bearish direction.
And as for longer EUR rates, they cannot withdraw themselves from spillover pressures forever. With central banks turning more hawkish and CPI data unlikely to appease inflation concerns in the near term, a more bullish tilt to rates might have to come from concerns about growth. Higher energy costs and a tightening of financial conditions should start to weigh on the economic outlook over the medium term.
But this risk seems to be largely ignored by markets. Whilst in our baseline we think growth should hold up, the balance of risk is clearly tilted to the downside. Therefore, we think markets will face resistance to price ever more hawkish monetary policy paths.
At some point, growth risks should take over from inflation risks. Wednesday’s events and market views The US will release US CPI data for May. Expectations are for the headline inflation rate to accelerate to 4.2% year-on-year and the core rate to nudge up to 2.9% YoY.
The only other noteworthy release is the US federal budget balance. One focus will be the still busy primary market, where we have already seen a slate of syndicated deals from sovereigns and SSAs this week, among others, Italy and the EU. Greece has announced a syndicated tap of its 10y bond, which should be Wednesday’s business.
Regular auction supply will come from Portugal, which reopens bonds in the 10y and 20y areas (€1-1.25bn), as well as Germany, which taps its 10y benchmark (€5bn). Later in the day, the US Treasury sells US$39bn in 10y notes. Rates Daily Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Benjamin Schroeder Senior Rates Strategist Benjamin Schroeder is a senior rates strategist at ING in Amsterdam. Before joining ING in 2016, he worked in fixed income research at Dresdner Kleinwort and Commerzbank in Frankfurt, Germany.… Michiel Tukker Senior UK & Eurozone Rates Strategist Michiel Tukker is a Senior UK & Eurozone Rates Strategist based in London.
Before ING, he worked as a quantitative economist for the Dutch central bank, at BlackRock in its Financial Markets… In this article Hot US inflation and still robust growth are adding upward pressure to global rates Wednesday’s events and market views
Sources & References
How we cover this story
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