Ceasing the ceasefire?

Daily update

Markets have had a muted reaction to reports of the US and Iran exchanging fire in the Gulf. Investors had tended to dismiss US President Trump’s weekend optimism and focused instead on comments from Iran, so an escalation was not unexpected. Prices are still not at levels that would bring supply and demand into balance (once reserves are exhausted), and various politicians globally talking of subsiding retail oil prices will make things worse.
Higher oil prices are being passed through to consumers which means profit margins are not being particularly affected. This can continue as long as consumers are using savings to pay for higher oil costs. It is not profit-led inflation unless margins are actually increasing.
Central bank comment has focused on the inflation rather than the growth aspect of higher oil prices. European Central Bank (ECB) commentary yesterday offered the predictable range—Nagel calling for rate increases, Villeroy suggesting there was insufficient data. New York Fed President Williams suggested rates could fall when inflation normalized, suggesting a lack of concern about second-round effects.
US March import and export data will both show oil price effects, but these will be muted given the timing. The data is a reminder that GDP growth can improve when most citizens’ living standards deteriorate.