Launch Pad

Canada’s annual inflation rate slowed more than expected to 1.8% in February from 2.3% in January, partly due to base effects from a temporary sales tax break introduced under Trudeau dropping out of year-over-year comparisons. Grocery price growth eased to 4.1% from 4.8%, led by slower increases in beef prices, while shelter costs rose just 1.5% annually, the slowest pace in five years. Gasoline prices continued to decline year over year but rose modestly on a monthly basis as oil prices increased ahead of the Middle East conflict. Core inflation measures also softened, with CPI excluding food and energy at 2% and the central bank’s trim and median measures both at 2.3%. The data reinforces expectations that the BoC will hold its policy rate at 2.25% at its upcoming meeting, though the outlook for rates will depend on how inflation evolves, particularly if rising oil prices from geopolitical tensions begin to push prices higher again. 

Is the end near? Officials in the U.S. say they expect the conflict with Iran to end within weeks and believe energy prices could fall once oil supplies recover, even as fighting continues and tensions remain high. Trump has threatened further strikes on Iran’s key oil export hub on Kharg Island and said the U.S. is not ready to negotiate a peace deal yet, while also pushing for a coalition of countries to escort tankers through the Strait of Hormuz. Iran, however, insists it is strong enough to continue the conflict and has rejected claims it is seeking negotiations, with officials stating the country is prepared to defend itself indefinitely. The war has effectively shut down most shipping through the Strait of Hormuz, disrupting energy markets, and keeping crude prices near $100. 

Pain at the pump. The U.S. Department of Energy has begun releasing 86 mln barrels of crude oil from the Strategic Petroleum Reserve as part of a larger coordinated effort with other countries to stabilize energy markets disrupted by the Iran war. The drawdown is the first stage of a planned 172 mln barrel U.S. release within a broader 400 mln barrel global plan to ease skyrocketing fuel prices. This comes as shipping through the Strait of Hormuz (responsible for about one-fifth of global oil flows) continues to be severely disrupted. Deliveries are expected to begin reaching the market within a week and will continue for roughly four months. There is a catch though, with companies that receive the oil responsible for returning it later with additional barrels as a premium. The move also comes amid political pressure on Trump to curb rising gasoline prices ahead of the upcoming midterm elections. 

Asian EM currencies have weakened amid the Iran war and rising oil prices, but regional central banks are beginning to intervene in an attempt to stabilize markets. Central banks, including the Bank Indonesia and the Reserve Bank of India have stepped into foreign-exchange markets to support their currencies, while China has signaled backing for the yuan by setting stronger daily reference rates. EM central banks have accumulated roughly $8 tln in foreign-exchange reserves, built up over years for periods of volatility, allowing them to counter capital outflows and defend exchange rates. Although currencies like the South Korean won, Indonesian rupiah, and Indian rupee have hit multi-year lows, analysts say the large reserve buffers may help limit further declines unless oil prices rise again, which would put additional pressure on energy-importing Asian economies and strengthen the U.S. dollar. 

Central banks aren’t only looking at their currencies. The war in Iran is forcing central banks around the world to reassess their policy outlook as rising oil prices threaten to reignite inflation and delay interest-rate cuts. Still, major institutions including the BoC, Fed, ECB, and BOE are expected to keep borrowing costs unchanged (for now at least) while they evaluate how higher energy prices will affect inflation and economic growth. Policymakers remain cautious because sustained disruptions to oil flows through the Strait of Hormuz could push prices even higher and create stagflation risks. The situation is expected to play out differently across the globe, with markets still expecting potential rate cuts in the U.S. while traders increasingly price in possible tightening in parts of Europe as well as Canada if inflation pressures continue. We’ll see what they have to say as it is a busy week for central banks. There will be rate announcements from the BoC and Fed on Wednesday, followed by the ECB, BOE, and BOJ on Thursday.  

At the Academy Awards last night, One Battle After Another dominated the evening, winning six Oscars including Best Picture and Best Director for Paul Thomas Anderson. The film also earned awards for Adapted Screenplay, Editing, Casting and Best Supporting Actor for Sean Penn (who was a notable no-show). Sinners won four awards, including Best Actor for Michael B. Jordan and Best Cinematography for Autumn Durald Arkapaw, who became the first woman and first Black cinematographer to win the category. Jessie Buckley won Best Actress for her role in Hamnet, becoming the first Irish actress to win the award, while Amy Madigan took Best Supporting Actress for her performance in the horror film Weapons. Golden got the gold as well, with the K-Pop Demon Hunter song becoming the first K-pop track to win Best Original Song. 


Diversion: One tight knit neighbourhood 

Gold slipped below $5,000 earlier this morning, following two consecutive weeks of losses, as the conflict in the Middle East entered a third week and investors weighed the inflationary impact of higher oil prices. Rising oil prices and inflationary concerns arising from the US-Israel war with Iran have put the metal under pressure, raising the prospect of fewer Federal Reserve interest rate cuts. Uncertainty over how long the war will last makes it difficult to assess the impact on markets and the wider economy. An aide to President Trump said the conflict could last four to six weeks, while both sides have given mixed signals. As the war drags on, prospects for an interest-rate cut have dwindled. The latest U.S. consumer spending data, released Friday, showed spending barely rose in January due to weaker-than-expected economic growth, even before the war began. Meanwhile, U.S.  consumer sentiment declined to a three-month low as fears mounted in recent weeks about the impact on gasoline prices from the conflict. Rate markets now see virtually no chance of a rate cut at this week’s Fed meeting.