THINK Ahead: An Eight‐Chart Easter Eggstravaganza

(MENAFN- ING) This energy crisis is better and worse than 2022

One month into the Iran war and it's worth taking stock.

The good news, to the extent that there is any, is that the level of the price shock isn't as bad as it was at the same point in the Ukraine conflict. Oil prices are still below the 2022 peak of 123 USD/bbl - about 140 in today's money, adjusted for inflation. And helpfully for Europe, gas prices remain much lower. As my colleagues wrote recently, Europe's relationship with natural gas has changed a lot in four years.

The bad news is things look much worse in percentage terms. And that is what matters more for inflation and the chance of rate hikes.

How the rise in energy prices compares to 2022 The economic impact is getting real

The other bad news is that there are scant signs of shipping recovering through the Strait of Hormuz. 50-60 tankers were typically transiting those waters daily in late February, according to IMF data. Now you can count them on one hand.

We've said all along that the economic impact of this crisis depends not just on how high energy prices rise, but how long they stay elevated. This week saw the first stories of widespread flight cancellations across Asia, together with other measures to conserve scarce fuel deliveries. This is a story that will likely hit Europe over the coming week or two, with increasingly unpredictable and potentially far-reaching economic effects.

How today's shipping disruption compares to the 2023 Red Sea crisis Markets are less confident about an April ceasefire

The starting point for the resumption of flows through the Strait is the question of a ceasefire. Betting markets think there's only a 27% chance that happens by the end of April, after another week of mixed messages from the US administration. Investors are weighing whether the White House will deploy the ground troops now stationed in the region.

Even if we do get a cessation of hostilities, does that guarantee the reopening of the Strait of Hormuz – and specifically, to what degree? And is that scenario enough to take oil prices sustainably back below 100 USD/bbl? And would that be enough to curtail the economic impact of the crisis and restore confidence in risk assets, or is it too late? Right now, there are no obvious answers.

What betting markets say about a ceasefire Markets still expect central banks to hike rates

"No obvious answers" could equally be applied to the central banks, though that's not how markets see it. In the eyes of investors, rate hikes are coming. Three are expected from the ECB by year-end and two from the Bank of England. The level of Bank Rate priced in a year's time is more than a percentage point higher in Britain than it was pre-crisis. Michiel Tukker, my Rates Strategy colleague, has a neat chart showing the clear relationship that's emerged between oil prices and central bank expectations since the war began.

Curiously, that relationship doesn't appear to have been jolted by what I felt was a pretty bold intervention by BoE Governor Andrew Bailey this week. In a very rare comment on market pricing, he said investors were "getting ahead of themselves". That felt like a not-so-subtle way of saying he doesn't intend to vote for a hike in April. And it's making me more comfortable in my current BoE call, which is that rates stay unchanged throughout this year.

How market interest rate expectations have evolved Governments aren't willing or able to splash the cash

So why is he willing to go into battle with markets over the issue of rate hikes? One reason might be the lack of government intervention so far in this crisis. Back in 2022, the UK government unleashed support worth in excess of 2% of GDP, much of it universally applied. That support was one of the reasons the Bank of England opted to hike rates as far as they did.

This time, measures have so far totalled less than £100m. And it's a story that is mirrored across Europe. Partly it is a question of timing. The heating season is ending; the acute need for support isn't there yet. And the fact that gas prices are so far much more contained than in 2022 questions the need for widespread support, anyway.

Clearly, that could change if the crisis worsens and persists into the summer. But it is another reason for the ECB and BoE to hold off on lifting interest rates for the time being.

How energy support compares to FY2022 Firms don't have the pricing power they did four years ago

Another argument against hikes is that so far at least, there is scant evidence that firms are able to pass on higher energy costs to consumers. We saw this with last week's purchasing managers indices (PMIs), where the jump in the proportion of companies facing higher input costs was considerably larger than those who are now raising output prices. We saw something similar with the European Commission's survey this week; outside of industry, there isn't much sign of a rise in selling price expectations. Ditto the latest BoE survey of UK companies.

Sure, it's early days. And I still believe, as I argued last week, that there is very little, if any data, due for release before the April meetings that can realistically influence the central banks' decisions. But the data fits with most of the evidence from recent months, which suggests this is not 2022 and firms lack the pricing power they had four years ago.

European selling price expectations Firms weren't willing to hire even before this crisis began

That lack of pricing power goes hand-in-hand with a jobs market that is in a much more fragile position than it was at the start of the Ukraine war. The US hiring rate (new hires as a share of total existing employees) fell again in February's data released this week and is now not dissimilar to where it was in the financial crisis. Something similar is true in Europe, particularly the UK. If anything, wage growth is more likely to fall rather than rise in the short to medium-term. That goes firmly against the idea that this crisis will lift inflation in the long-lasting way central banks worry about.

The US hiring rate is perilously low Surprise! Consumers are noticing higher prices

Having said all that, if there's one chart that gives me pause for thought, it's this. Consumer inflation expectations are rising - sharply. That is not remotely surprising, given these surveys essentially just track petrol prices. Nor, in a weaker jobs market, does it mean they have the power to respond by chasing higher wages.

But for central banks that worry more about the risk of inflation expectations becoming "unanchored", the clear risk is that they look at this chart and push ahead with rate rises to send a clear message. Fed Chair Jerome Powell said again this week that five years of above-target inflation may well start to filter more permanently into the consumer and business mindset.

I'm still not sold, as you might have gathered. And for the time being, our house view is unchanged. We don't expect rate hikes on either side of the Atlantic, at least when it comes to those April meetings that are drawing ever closer.

Consumer inflation expectations are rising THINK Ahead in developed markets

United States (James Knightley)

CPI (Fri): March consumer price inflation will be the big report to watch next week with surging gasoline prices set to push annual inflation back above 3%. While natural gas prices have actually fallen in the US, limiting the potential impact from the Middle East conflict on broader utility bills, gasoline does have a weighting of more than 3% in the inflation basket. Add in lubricants, distribution costs and air fares, and we suspect that the month-on-month change in CPI could total 1%, lifting the year-on-year rate to 3.4% from 2.4%. After all, on a non-seasonally adjusted basis, the national average retail price of gasoline was $3/gallon on 1 March versus more than $4 at the beginning of April, with potential for it to hit $4.50 in the next few weeks. Core inflation will be more muted, but still a relatively hot 0.3% or even 0.4%MoM. Nonetheless, we continue to doubt the Fed will raise interest rates. We think there is a greater chance that today's energy shock is demand destructive in that households have less discretionary spending power. This should diminish the chances of broader, more persistent inflation while the cooling jobs market remains a growing issue for the Federal Reserve.

THINK Ahead in Central and Eastern Europe

Poland (Adam Antoniak)

NBP rates (Wed): A moderate increase in CPI inflation in March, the absence of any signs of upward price pressure apart from fuels and government intervention on retail petroleum prices should provide policymakers with enough comfort to stick to a wait-and-see approach for now. We expect rates to remain unchanged in April. The Monetary Policy Council (MPC) will closely monitor upcoming data searching for any signs of broader price pressure (core inflation, food prices) or second round effects. Our baseline scenario assumes the National Bank of Poland rates will stay at the current level of 3.75% by the end of this year.

Hungary (Peter Virovacz)

Industry/retail/inflation (Wed): We are approaching an ultra-rare Super Wednesday, when the Hungarian Central Statistical Office will release three key sets of data. Starting with the data related to the real economy, we see strong retail sales figures for February, despite the expected drop in the fuel sub-sector due to extremely high fuel sales in January. After two consecutive months of growth, we expect the trend to end and industrial production to probably shrink on a monthly basis, with year-on-year stagnation. However, the most interesting data will be the March inflation figures. Despite the government acting quickly to cap fuel prices, the impact will still be significant. The increase in the minimum wage will probably continue to put pressure on service prices, and the significant weakening of the forint will also push up imported inflation. Nevertheless, thanks to the low starting point, inflation will appear acceptable at 2.2% year-on-year, but we anticipate further acceleration in the coming months.

Czech Republic (David Havrlant)

CPI (Tue): Inflation in March likely quickened on the back of rising fuel prices, reflecting elevated global oil and natural gas prices along with a stronger dollar. The fuel reaction is likely to be swift, and other price segments are about to follow suit with a lag. February's real retail sales likely remained robust, supported by real wage gains, despite the registered unemployment rate being set to hover around recorded levels observed since 2017. Czech industry has stabilised in the previous year, and February's output is expected to carry on in annual growth, but still at a rather muted pace.

Key events in developed markets next week Key events in EMEA next week

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