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Good morning. As we approach the fourth week of the war in the Middle East, hopes for a short conflict are slipping away. Deeper worries about the supply of oil are raising fears of inflationary spillovers. Short-term rates have risen meaningfully in the US, sharply in Europe and frighteningly in the UK. This pattern in and of itself is not surprising, given the differing vulnerabilities of the three economies to supply shocks. More surprising, perhaps, are the moves at the long end of the rates curve. There has been a significant rise in 10-year break-even inflation since February 27 — as much as 0.44 per cent in the UK — indicating concerns about second-order effects from the oil crisis.
Thierry Wizman at Macquarie believes markets are beginning to price in the worst case. “One of the reasons things have been so violent is that a lot of people were positioned for central bank rate cuts this year. Now we’ve swung away from an easing outlook to maybe even a tightening outlook,” Wizman said.
So far, investors are looking more hawkish than central bankers. The official posture across global central banks remains to wait and see. This puts investors and policymakers notably out of sync. Are rate expectations getting ahead of themselves? And are bond markets, particularly at the short end, oversold? Send us your thoughts: unhedged@ft.com
Good reads from Unhedged
Hakyung: Looking to the past
Rob: How not to respond to an oil shock
Katie: A steep learning curve
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