Does An Oil Supply-Shock Really Warrant Central-Bank Hikes?

Ahead of a very busy week of policy-maker prevarications, markets are repricing expectations of central banks' moves in a notably hawkish direction... JPMorgan's Equity Strategy team believes "this is likely unwarranted."

Bond yields have spiked in the last two weeks...

ECB rate forecasts are up by as much as 55bp+ since the escalation and traders have also taken out expectations for Fed cuts, by as much as 40 bp since the start of the month...

Mislav Matejka and his team believe that regardless of future geopolitics direction, the move in bond markets might not sustain.

If this conflict ultimately leads to a recession, it is of course unlikely central banks will be hiking, and if there is a respite, any inflation spike might be looked through.

If the conflict continues, along with high energy prices, this would impact growth as well, potentially forcing central banks to look through higher inflation.

If this ultimately leads to a recession, it is unlikely central banks will be hiking, and if there is a respite, any inflation spike might be looked through.

If the conflict subsides, JPMorgan's economists flag that a scenario in which still-elevated risk premia are unlikely to derail this year’s solid growth outlook, but will raise 2026 global CPI inflation by roughly 0.5%pt from an already elevated level.

However, they do not believe that this scenario will generate the rate hikes now anticipated in Europe, as regional growth will prove relatively sensitive to this shock.

For those with short memories, JPMorgan notes that there are a lot of differences to 2022, when the inflation up-move was stoked by the fallout from COVID shock.

In addition, the increase in gas prices, which is key for Europe, has been relatively muted compared to what trans- pired in 2022 when pipelines were destroyed.

JPMorgan concludes (echoing Citadel's view earlier) that we should see the long duration trade back on before long.

Professional subscribers can read the full note from JPMorgan "Does Oil Supply Shock Really Warrant Central Bank Hikes?" here at our new Marketdesk.ai portal