Breaking The Stalemate

By Bas van Geffen, Senior Macro strategist at Rabobank

Energy prices continue their ascend –with Brent futures trading above $124/barrel – after media report that the US may try to break the stalemate in the US-Iran war by force. Axios reports that military leaders will brief Trump on potential military options today. Reportedly, the Pentagon is preparing a wave of still forecast two rate cuts from a Warsh-led Fed this year. However, as we have flagged before, we think that in the coming months are more likely to drop a rate cut from our forecast than add one.

But the biggest surprise was arguably Powell’s personal decision: the current Fed chair announced that he will continue to stay on as governor for some time after his term as chair ends. This does not mean he will serve out his term as governor; Powell said he will leave when he thinks it’s appropriate – which he seemed to tie to the legal attacks on the central bank. Powell did suggest he would keep a lower profile, and that he would not try to undermine Warsh out of respect for the role of Fed chair.

Returning to energy prices, the fresh highs for Brent this week provide a sobering backdrop to the otherwise better-than-expected April inflation data for the Eurozone countries. Overall, German and Spanish inflation data for April were on the lower end of expectations – although the harmonized inflation measure still ticked 0.1 percentage point higher in Spain.

VAT cuts on petrol have certainly softened the blow. The fact that energy prices were somewhat lower in the first half of April may also have limited energy-driven price pressures for the month. That may be short-lived, given that the price of energy commodities has been on the rise again.

But the miss wasn’t entirely driven by lower energy prices – core inflation, i.e., inflation excluding energy and food, came in a bit lower too. Clothing and recreation –the Spanish bureau of statistics specifically mentions package holidays– were the main reasons why core inflation decelerated compared to the prior month. However, keep in mind that pricing of these goods and services can be quite erratic, due to seasonal shifts and the timing of holidays like Easter. So, this is a mitigating factor for now, but we don’t think that this is a sign of broader disinflation.