Let's get to the big story.
Breakdown.
While Wall Street is looking at a sharp rally this morning while oil prices are plunging below $100 a barrel.
Trump announcing that he is suspending planned military attacks on Iran for two weeks, and this 11th hour ceasefire was brokered in part by Pakistan's Prime Minister.
Back from the brink of the president's 8 p.m. deadline while the agreement hinges on around reopening the Strait of Hormuz and joining me to weigh in this morning isJames Knightley, ING's Chief International Economist.
James, great to have you here.
Thank you so much for joining.
Well, we are seeing green across the board when it comes to equity markets, not just here in the US but also overseas, but there is still a lot of caution and uncertainty regarding the.
Fires.
So how are you looking at what we're seeing 24 hours ago we were bracing for a dramatic escalation of the conflict.
So the fact that we have stepped back so significantly is a big story.
It provides a lot of relief right now.
But as you say, it's a two week deal and there's a lot to discuss and there's a lot of strong positions out there, strong viewpoints on both sides that are going to be reluctant to step back on what their demands are.
I think there's still a little bit of skepticism about this.
It's probably a two week deal that will hopefully get extended because the time frame just doesn't doesn't seem long enough to get all the boxes ticked.
So we'll be looking for this deal and then positive signals and an intention to extend it to get a full resolution.
That's when I think equities and other risk advocates really breathe a sigh of relief.
But until then it's more of a cautious optimism than a green light.
Let's keep going.
And when we look at oil prices, we are looking at both contracts WTI as well as Brent pulling back sharply well over 15% this morning.
But we have to keep in mind that we have seen quite the run up in global oil prices as well as energy, and that does affect the inflation picture.
So later today we will be getting the FOMC meeting minutes from the March meeting.
But what do global central banks have to deal with right now and Do you think the Fed is watching oil prices have fallen a long way today, but are we going to return to the 60 to $70 a barrel quickly?
We just don't know the damage to the infrastructure.
We don't know about how the flows are going to progress.
Is it going to be a full 100% flow back next week?
It may not be.
So there's still a lot of uncertainty there.
So I don't think we're going to see dramatic falls from where we are right now unless we get some real real positive boosts coming through.
I think from an inflation perspective though, there's always a lag between gasoline prices and oil prices and the oil prices where we were at $115 a barrel were historically consistent with gasoline at $5 a gallon.
OK, we've dropped back to the mid 90s now, that's still consistent with gasoline at about 425, 450.
That's still painful for consumers and it's still going to lift inflation because we were at $3.20 this time last year.
That in itself is going to lift us to perhaps 3.5% inflation on Friday.
And we could get a little bit more in April and May as well.
So I think the Fed and other central banks are still a little bit nervous about that, but they are also cognizant of the fact that this is actually eroding spending power.
We're in a very different situation to 2021, 2022 where we had a supply shock and we had all the stimulus checks, all the jobs creation, all the rapid wage growth.
We don't have that today, so there's not the demand.
To keep inflation pushing higher and higher and higher.
So I think from my perspective I'm looking for the Fed to signal that as Jerome Powell did last week, they think it is a supply shock, they can't do a lot about it.
They're watching inflation expectations and that's the critical thing.
If inflation expectations start to rise, then they may have to take action.
If not, then we're probably on a stable rates. and one part of what you just said I do want to zoom in on is wage growth because we got that jobs report out last week.
Nonfarm payrolls, the headline figure may have come in better than expected and the unemployment rate in the US also pulled back to 4.3%.
But we have to keep in mind all of the revisions as well as the lack of wage growth in consideration of the Inflation rate here in the US, so what should Americans be paying attention to?
That's right, I think the jobs number on Friday was better than expected, nearly triple what was expected to be fair, and the unemployment did drop.
But we are looking at the services.
There's a lot of contradictions in the data.
So for example, the ISM services index, which we also followed very closely.
Rather than having a really strong employment number for March, they had an awfully weak number for March.
So again, there's lots of contradictions in there that the Fed are having to feel their way through.
So it's not only difficult for us and the general population, it's very, very challenging for the Federal Reserve.
But in terms of the jobs market, I think one of the critical stories that's really quite concerning is that there's now more people unemployed than there are job vacancies, and that's never a good look for wage growth or consumer confidence.
I think that balance is something that we've got to keep an eye on as well.
And in New York morning trade, we are looking at recent gains for the US currency pulling back as we look at risks assets higher.
But when we think about what global economies, even in the G7 nations, have to deal with, we know that rate differentials also matter.
So given what we're seeing in the foreign exchange market, what does this actually mean in the bigger picture?
Yes, I think Europe and Asia are always going to be much more vulnerable to the problems in the Middle East than the US.
The US has got no supply.
Concerns at all.
It's got a price issue about gasoline, but that's about it, whereas in Europe and Asia they've got the price concerns about gasoline, but also the concerns about natural gas and actually the supply of natural gas as well.
So there's much more concerns about the economic impact.
There's a lot more relief coming through today, obviously.
You've seen Japanese equities up 5.5%.
So that I think just underscores that if we can get a de-escalation, that's really, really good news for the European and Asian growth story.
And again, people are looking for alternatives.
It's not just the US that's the only be all and end all.
In terms of investment, people are starting to look at diversification, and I think this will help that story and again we'll put a little bit more downward pressure on the dollar over the next month or less than 60 seconds here, but you mentioned the word diversification and that is something that all of us are looking at right now.
So what does that look like for you over at I mean I think it's interesting looking at the the normal sort of safe havens that you would expect haven't necessarily been coming through this time around.
It's just looking to see.
What the options are, I mean the dollar's done pretty well despite the concerns about the dollar is that going to unwind dramatically, so I think that's probably the big risk, you know, where we could see some big news it's more on the currency side right now.
The equity market is still a little bit cautious looking at are we going to get a deal longer term bond markets and interest rates similarly as well.
James, always great having you on the show.
Thank you so much for joining us and thank you so much for your perspective.
Thank you.
