Oil jumped on rising geopolitical tensions in the Middle East. Deflationary pressures persist in China

Yesterday, we also saw several speeches by FOMC officials. FRB Richmond President Barkin said he supports the Fed’s patient stance in determining when to start easing monetary policy. FRB Boston President Collins said she needs further evidence that inflation is steadily toward the Fed’s 2% target before cutting interest rates. FRB Minneapolis President Kashkari said it would take time to evaluate the data before cutting interest rates, and he sees two or three 25 bps rate cuts this year as appropriate. But the likelihood of a rate cut at the April meeting was little affected. Currently, markets are pricing in a 21% chance of a 25 bps rate cut at the March 19-20 FOMC meeting and an 82% chance of a 25 bps rate cut at the April 30-May 1 meeting.

ECB executive board spokesperson Schnabel said yesterday that due to solid service sector inflation, a resilient labour market, markedly weaker financial conditions, and Red Sea tensions, these factors caution against a policy rate adjustment too rapidly.

WTI crude futures climbed above $74 a barrel on Thursday and rose for the fourth straight session as renewed tensions in the Middle East further heightened fears of supply disruptions. On Wednesday night, Israeli Prime Minister Benjamin Netanyahu rejected a ceasefire offer from Hamas, although US Secretary of State Antony Blinken said there was still room for talks. Investors also remain wary of possible further US military action against Iranian forces and allied militias. On the demand side, official data showed that US gasoline inventories fell by 3.15 million barrels last week, well above forecasts of 140,000 barrels. Meanwhile, US crude oil inventories rose by 5.5 million barrels last week, exceeding market expectations of 1.895 million barrels.

Asian markets were mostly up on Tuesday. Japan’s Nikkei 225 (JP225) gained 1.14% for the day, China’s FTSE China A50 (CHA50) jumped 0.22%, Hong Kong’s Hang Seng (HK50) was down 0.80% on the day, and Australia’s ASX 200 (AU200) was negative 0.12% on the day.

Bank of Japan Deputy Governor Shinichi Uchida said that the central bank will not aggressively tighten monetary policy, even if it decides to eliminate negative interest rates. Amid these statements, Japan’s Nikkei 225 index (JP225) jumped sharply and is trading at its highest levels in 30 years.

As expected, the Reserve Bank of India kept the benchmark repo rate at 6.5% for the sixth consecutive meeting in February 2024 amid continued price pressures. The latest move came after annual inflation accelerated to a four-month high of 5.69% in December due to higher food prices but remained within the target range of 2-6% in the medium term. The RBI chief reiterated his commitment to bring inflation down to 4% on time and sustainably. Further, the central bank has projected economic growth of 7% in FY 2025.

The latest economic data showed that consumer prices in China fell in January by the most in more than 14 years, while producer prices fell for the 16th consecutive month. However, analysts say Chinese authorities are likely to seek to stabilise the currency amid efforts to sustain the fading economic recovery. The yuan has also been supported recently by the prospect of more robust and concrete policy measures to support Chinese assets. The country’s securities regulator has pledged to prevent abnormal market fluctuations and will reportedly keep President Xi Jinping informed of market developments. At the same time, state fund Central Huijin Investments has promised to expand ETF purchases.