Markets Wrap (1H March)
Focus on any hints from central bank officials
On March 7th the ECB has convened its meeting without any policy changes. With the outcome meeting expectations, all eyes were on the bankers' comments and expectations. The ECB has lowered its 2024-25 inflation projections, but at the same time cut GDP expectations for this year from 0,8% to 0,6%. President Christine Legarde has emphasized the ECB's data dependent process, and especially high wage data. While wage growth has finally slowed in 4Q, crucial 1Q data will only be available after ECB's April meeting, leading investors to believe that the first cut will happen in summer.
Fed to hold rates steady as inflation stays elevated
February inflation data has inched up to 3,2% from 3,1% in January. While energy, goods and energy prices moderated, service prices have stayed very sticky. Among those, shelter and insurance prices have contributed the most. While the less volatile core CPI has fell to 3,8%, prices are increasing at a higher rate than the 2% Fed's target rate. The CPI print solidified expectations that it is too early to lower rates and no changes are expected during Fed's meeting on March 20th. Now the market is looking at 0,75% of rate cuts by the end of the year with the first cut during the summer.
Additionally, the Fed will also publish a new dot plot that reflects the views of fed official members, however, there is little evidence to believe in any deviations from the median result of 0,75% rate reduction in 2024. Strong US growth and elevated inflation should keep Fed at bay.
Bank of England has little room to maneuver
March 21st will see the BoE meeting, where the central bank is expected to leave interest rates unchanged. Even with UK's interest rates held elevated at 5,25%, the inflation is still relatively high at 4% for January. However, market consensus expects a sharp reduction in inflation with 3,5% expected for February. While short term BoE has little pressures to lower rates, if inflation continues as expected conditions may loosen.
Diesel prices remain elevated
Ever since Russia's invasion of Ukraine, diesel prices have stayed at a hefty premium above oil prices. With tight refinery capacity, the spread has stayed elevated above 20 USD per barrel. Few new facilities were built in addition to major oil companies shutting refineries to try to meet net zero emissions targets and face the threat of electric vehicles. This has been highlighted further in Europe, as the old continent crude distillation capacity is expected to be 6% lower in 2026 when compared to 2020 (Source: Argus Media). Furthermore, attacks on russian refineries have helped both oil and refined product prices to increase around 5% during the last week.
Relative calm in the oil market despite many woes
Despite OPEC+ oil supply curbs and increasing prices, the oil market has been relatively calm. With the recent fear peak being reached at the start of the Israel-Hamas war, now markets have concluded that the spillover effects are limited and there is less unknown to be concerned about.
