Geopolitical risks in the Middle East support crude oil prices. RBNZ intends to raise rates further

The US Bureau of Labor Statistics left the core US Consumer Price Index for Q4 unchanged at an annualized rate of 3.3%. Fed comments on Friday were a bit hawkish and supported the dollar at the end of the trading day. Dallas Fed President Logan said she sees no need for additional interest rate adjustments at this time and is confident that the progress being made in inflation will be sustainable over the medium term. Atlanta FRB President Bostic also said that the Fed must “stay the course” to ensure inflation returns to the 2% target. Markets rate the odds of a 25 bps rate cut at 19% for the March 19-20 FOMC meeting and 73% for the next meeting on April 30-May 1.

On Friday, ECB Governing Council spokesman Kazaks said that there are now expectations that the ECB may cut interest rates in the spring at its March or April meetings, but that one should not be overly optimistic. Croatian central bank governor Boris Vujcic said there was no rush to cut record-high borrowing costs and that it was better to wait and see if inflation was decisively beaten. Many more ECB chiefs will be in front of the microphone in the coming days. The euro can probably count on additional support if they repeat this statement. Swaps currently estimate the odds of a 25 bps ECB rate cut at 9% at the next meeting on March 7 and 53% at the next meeting on April 11.

Oil prices will remain volatile in the coming days after rising on Friday, up 6% for the week. Bullish for oil prices were comments by Israeli Prime Minister Netanyahu on Thursday when he said Israel could achieve total victory over Hamas within months and rejected any ceasefire talks. A continuation of the war threatens to escalate and widen the conflict across the Middle East, a region that accounts for about a third of global oil production. In addition, Friday’s rally in the S&P 500 Index to a record high showed confidence in the economic outlook, which positively impacted energy demand and crude oil prices.

Asian markets traded mostly higher last week. Japan’s Nikkei 225 (JP225) gained 1.31% for the week, China’s FTSE China A50 (CHA50) jumped by 4.47%, Hong Kong’s Hang Seng (HK50) ended the week up 2.67%, and Australia’s ASX 200 (AU200) ended the week negative 0.71%.

Financial conditions in Japan will remain easy for now even after the Bank of Japan ends its negative rate regime, Bank Governor Kazuo Ueda said late last week. Ueda’s comments were the latest statement from Bank officials, who assured market participants that any end to negative rates would not herald a change in the Bank’s core policy. The International Monetary Fund has supported the BoJ’s cautious approach, recommending gradual rate hikes once inflation becomes sustainable. These dovish statements suggest that the BoJ’s exit from its ultra-low stance is unlikely to result in multiple rate hikes, as has been seen recently in other key economies, but rather limited to a few scattered increases. In theory, this could limit the yen’s recovery potential in the coming months, making it less attractive in yield differentials than its major peers.

The New Zealand dollar continues to rise as currency markets assess further interest rate hikes by the Reserve Bank of New Zealand following last week’s strong labor market data. According to money market pricing, investors now believe there is a 90% chance of a further 25 basis point interest rate hike by May. Markets have postponed the first RBNZ rate cut until November. The RBNZ will, therefore, be one of the last major central banks to cut rates, which will support the New Zealand dollar.