The Overnight Report: March Rate Hike Likely

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Mixed messages continue to ebb and flow from the US Administration and Tehran over the war and a possible cease fire, while the IEA and energy suppliers grapple with Strait of Hormuz challenges.

US markets were broadly flat with strategy-amending Oracle leading tech higher overnight.

Fixed interest locally is pricing in a circa 70% change of a March 17, RBA rate hike. The ASX200 finished higher yesterday, led by a small selection of gainers.

Futures are pointing to a soft start today.

Good Morning,

Despite rising odds of an RBA rate hike next week, the ASX200 rose 51 points or 0.6% to 8,744.

Miners, up 2%, and banks led the rally while utilities and technology lagged.

NAB Markets Today Research extract

 Risk sentiment remains fragile with the market still focused on the Iran conflict and implications for the energy market.

The US-Israel Iran conflict remains tense with a low probability for a resumption of vessels travelling through the Strait of Hormuz any time soon. Markets remain focused on the energy fallout.

Iran has stepped up efforts to disrupt shipping, striking three commercial vessels and signalling it will not allow oil to pass through the strait, through which around 20mb/d normally flows.

The US says it has destroyed multiple Iranian vessels, including 16 mine-laying boats, but has so far declined to escort civilian shipping until the threat eases.

In response to the scale of the disruption, the International Energy Agency announced a coordinated release of 400million barrels from strategic reserves — the largest in history, and much larger than the 182m figure reported by the WSJ during our day session yesterday.

Japan also confirmed it will release 80m/b from mid-March, though analysts remain sceptical that reserve releases can fully offset a prolonged closure of Hormuz.

President Trump has struck a confident tone, talking up the success of US military operations and downplaying the longevity of the conflict. In comments reported by Axios, Trump said the war would end “soon”, arguing there is “practically nothing left to target” and claiming  he could end the conflict whenever he chooses.

Developments on the ground and rhetoric from Tehran point to a more tense reality. Attacks have continued across the Gulf region, US forces remain focused on degrading Iran’s missile and drone capabilities, and Washington has urged Israel to avoid further strikes on Iranian energy infrastructure without approval.

Iranian officials have shown no sign of backing down, with a military spokesman stating Iran will not allow “even a single litre of oil” to pass through Hormuz for the benefit of the US or its allies. The contrast between Trump’s optimism and Iran’s actions underscores sharply different narratives around the conflict, keeping oil prices volatile and geopolitical risks elevated.

Indeed, to illustrate this latter point, Brent and WTI oil are 5% higher over the past 24 hours, notwithstanding news of the largest historical release of strategic oil reserves. Looking at other commodity prices, aluminium is up 1%, iron ore little changed at 0.4% while Gold and copper are down between -1.25%/-1.5%.

Early this morning, Bloomberg notes Iran has told regional intermediaries that for a ceasefire, the US must guarantee neither it nor Israel will strike the country in the future, according to several officials familiar with the matter. But it is unclear whether the US is willing to give Iran such a pledge and if it would be able to insist on Israel doing the same.

Moving onto US data releases, February CPI rose 0.3% m/m, with core CPI up 0.2%, both in line with consensus, confirming inflation remains too firm for the FOMC to pivot toward labour-market support for now. 

The headline was lifted mainly by a 1.1% rise in energy goods and a 0.4% increase in food at home. While core inflation reflected modest gains in goods prices —driven by household furnishings (tariff effects) and a sharp 6.5% jump in computer software— partly offset by further declines in used cars.

Core services inflation ran at 0.27% m/m, masking slowing rent pressures, with primary rents rising just 0.13%, alongside renewed strength in discretionary services such as airfares, accommodation and medical care (much of which does not feed into PCE).

Based on the CPI info, Pantheon economics estimates core PCE inflation likely rose around 0.4% m/m in February, boosted notably by software prices, though this remains subject to revision given reliance on non-CPI components. 

Looking ahead, higher oil prices are set to push headline inflation higher in the near term, but pass-through to core inflation should be limited and largely temporary if energy prices stabilise or reverse later this year.

10y UST yields were on the rise from the start of the European session and by the time the 10y UST auction came, placing a bid on a rising yield backdrop didn’t seem like an appealing proposition. 

Concerns over inflation and fiscal issuance impact from the Iran conflict overwhelmed any positive vibes from a benign February CPI report. The when-issued 10-year yields of 4.20% was close to the session high at the time (now at 4.2043%) with stats revealing the largest tail and the smallest bid-to-cover ratio for a reopening since April 2024.

A tepid direct bidder demand, lowest in a year, suggests buyside investors were not keen on buying 10y UST at current levels.

By the time the auction closed, 10y UST yields were 6bps higher relative to our Sydney close levels, and the fact the rise in yield didn’t extend post the auction suggests the market was already pricing a soft outcome. Focus will now turn to tomorrow 30y auction, suggesting the back end of the curve could be at risk of some upward pressure if faced with a similar tepid demand.

The UST curve bear steepened overnight, relative to Sydney closing levels the 2y Note is up 5.5bps, while the 10y is up 6.2 to 4.20% and the 30y is up 7.7bps to 4.869%. Earlier in the overnight session, 10y Gilts closed at 4.69%, up 23bps, while 10y Bunds reached 2.93%, 10bps higher on the day.

US equities edged lower as investor attention remained firmly on the Middle East conflict, overshadowing earlier inflation data that pointed to easing price pressures. 

The S&P 500 and Nasdaq100 finished broadly flat on the day. From a technical perspective, the S&P is still trading below its 50- and 100-day moving averages pointing to downside risks amid heightened volatility.

At the stock level, Oracle surged 8.5% on strong earnings and an upbeat outlook underscoring resilient AI-related demand, while Campbell’s fell -6.1% after cutting its profit outlook and AeroVironment dropped -5.5% after issuing a weak revenue forecast. 

Earlier in Europe, the Eurostoxx 600 index closed -0.6% lower while the UK FTSE was -0.56%.

In the currency market, the USD is stronger across the board, benefitting from both higher energy prices and safe-haven demand. Relative to Sydney closing levels, the AUD is down -0.5% to 0.7144, earlier in the session the AUD traded to an overnight high of 0.7187, before Iran news weighed on sentiment.

That said, looking at levels over the past 24 hours, the AUD stands out as the only G10 pair to outperform the USD, the aussie has had some support following a few RBA watchers calling for the RBA to deliver a back-to-back 25bps hike next week, pricing for next week is at around 70% priced.

Our economists have also joined this call noting the starting point of robust growth, a too-tight labour market and too-high inflation already supported further tightening. Now new upside pressure on inflation tips the balance in favour of an additional increase.

Much will depend on the trajectory of oil prices and the domestic data flow, and we see two-sided risks around our new central case for a 4.35% peak. Further out, we continue to expect gradual easing back towards more neutral levels from H2 2027.

Looking at credit, risk aversion in the air has weighed on sentiment, Amazon led issuance activity in Europe’s primary market on Wednesday, selling a EUR14.5bn debut euro bond across eight tranches, the largest number seen in the region, according to data compiled by Bloomberg.

The notes, maturing from two to 38 years, drew in final investor bids of around EUR27.9bn. The sale came a day after the tech giant priced US$37bn of bonds in an 11-part US transaction that drew peak orders of more than US$126bn.

Meanwhile, Salesforce’s US$25bn, eight-part deal headlined total daily volume of US$41.7 billion for the US investment-grade primary market on Wednesday, already making this the third-busiest week ever.

RBA to hike 0.25% in March, follow up in May expected, Luci Ellis, Westpac extract

We revise our view of RBA policy: 25bp hikes in both March and May expected. Single hike still possible but not our base case.

The RBA is now expected to hike rates 25bp in both March and May; this is a change from our previous view of a single hike in May with further hikes as a risk only. The expected peak cash rate is now 4.35%.

The effect of higher oil prices on headline inflation is large but temporary. The RBA Monetary Policy Board will nevertheless feel compelled to react, especially given the hit to confidence and financial markets has so far not been severe.

Key information shifting our view is RBA communication revealing it has not changed its pessimistic view of growth in supply capacity following the national accounts, even though data revisions, consumption and unit labour costs paint a more benign picture.

In addition, it has signalled a willingness to respond to the spike in headline inflation to head off a sustained rise in inflation expectations. This is despite expectations having remain anchored in recent years in the face of more lasting shocks.

There are good arguments for staying on hold until May given the temporary nature of the shock and the possibility of more extreme market instability. A split vote at next week’s meeting is possible.

Market participants should allow for the possibility that the RBA opts to wait until May, but it is no longer our base case.

Similarly, a swift and clear resolution of the war (and fall in oil prices) or a clear and sudden loss of momentum in domestic activity would mean the expected March hike would not be followed up in May. Again, this is not our base case.

By the end of next year, underlying inflation will be close to the 2½% target midpoint and unemployment noticeably higher. It will also be clearer that supply capacity growth is above 2% and that labour market slack is building outside the formal labour force.

We therefore also shift our expectations of the necessary reversal of tight policy, to Nov and Dec 2027 and Feb 2028 (was Nov 2027 and Feb 2028).

These more frequent shifts in policy are a consequence of the refinement to the RBA’s mandate in the latest Statement on the Conduct of Monetary Policy.

In addition, we assess the recent changes in the composition of the Monetary Policy Board have made it more comfortable with policy activism and attempts to fine-tune policy to hit the target midpoint by a fixed horizon.

Oil’s New Center of Gravity? Stephen Innes, SPI Asset Management extract

Speculating about the duration of a Middle East war is a mug’s game at the best of times and financial suicide at the worst.

On trading desks, the old saying still holds true: trading war is not analysis, it is exposure. And yet markets are paid to handicap probabilities even when the outcome ultimately sits in the hands of generals and one notoriously fickle president rather than economists.

Strip away the noise, and the strategic logic becomes clearer.

For Iran, the primary objective is regime survival. Tehran can absorb punishment, but it cannot afford humiliation. A government that appears defeated at home risks losing the fragile perception of legitimacy that keeps the system intact.

That reality alone suggests this conflict is unlikely to end with a dramatic white flag moment. Instead, it is far more likely to drift into the murky middle ground that geopolitical conflicts often inhabit, where neither side achieves decisive victory yet both continue to probe the limits of escalation.

Washington faces a different constraint. President Donald Trump has publicly framed the conflict as short, signalling a political preference for a quick declaration of success and an exit ramp. But markets do not trade rhetoric. They trade behaviour. And behaviour so far tells a different story as military assets continue to flow into the theatre, and the tempo of operations rises rather than falls.

The gap between the political narrative and operational reality is precisely the kind of disconnect that tends to keep risk premiums embedded in commodity markets long after equities convince themselves the worst is over.

A popular narrative circulating in macro circles is the so-called TACO theory, shorthand for the idea that Trump ultimately backs down under pressure. But that thesis depends heavily on the other side cooperating with the script.

Iran has little incentive to provide the kind of symbolic concession that would allow Washington to declare victory.

As BCA’s Marko Papic bluntly framed it, Tehran is unlikely to “eat the taco.”

Even more important is the structural risk embedded in the Strait of Hormuz itself. Once a conflict demonstrates how easily the waterway can be disrupted, the genie does not go back into the bottle.

Cheap drones, rogue factions or militia actors operating beyond Tehran’s full control could threaten shipping long after any formal ceasefire. In other words, The Strait is not a switch that policymakers simply slip back to normal. 

For markets, the next story is unfolding in the physical plumbing of global oil flows.

Earlier in the week, I assumed roughly five million barrels per day would get rerouted around the Hormuz bottleneck. But shipping contacts moving the barrels are telling a different story.

As one tanker operator put it to me, “This isn’t five million barrels being shuffled around. It’s closer to eight million, and it’s basically a flip of the switch. Everything is being repositioned from east to west.” 

That adjustment is not a short-term detour but a structural rewiring of flows. Saudi Arabia is already pushing that shift to its limits.

Saudi Aramco is maxing out its east-west pipeline to Yanbu, a corridor capable of carrying about 7 million barrels per day directly to the Red Sea. CEO Amin Nasser has said the line should reach full capacity within days as tankers divert toward the Red Sea export hub. 

The UAE is implementing a similar workaround via Fujairah, where exports have jumped to roughly 1.6 million barrels per day this month, up from a recent average of about 1.1 million.

In other words, the Gulf producers are redrawing the logistics map in real time, flipping flows from the Persian Gulf side of the peninsula toward the Red Sea and Indian Ocean. That shift explains why crude has been circling the US$88-US$92 level rather than toward the mid US$97-US$100, where I had originally expected oil to trade this week.

Gulf producers are attempting to redraw the map of global crude flows on the fly, shifting barrels from the Persian Gulf side of the peninsula to the Red Sea and Indian Ocean. Ship-tracking data already show more than two dozen tankers diverting toward Yanbu, effectively creating a floating convoy system as the industry re-engineers its supply chain around a geopolitical chokepoint.

Even so, the scale of disruption should not be underestimated. Bloomberg estimates roughly six percent of global oil output has already been affected by the turmoil around the Strait of Hormuz. 

Adding another layer to the equation is the policy response. The International Energy Agency is reportedly preparing what could become the largest coordinated release of strategic petroleum reserves in its history. Such a move may dampen volatility in the near term, but it does not solve the underlying logistics problem.

Strategic stockpiles can temporarily plug a hole in supply, but they cannot rebuild disrupted shipping lanes or eliminate the geopolitical risk premium attached to Hormuz. Think of it as pouring water into a leaking barrel. The level may stabilize for a while, but the structural weakness remains.

There was a brief glimpse of how fragile the situation is when a US naval escort guided an oil tanker through the strait, pushing Brent briefly toward the low US$80s as traders interpreted the maneuver as a signal that traffic might normalize. But escorting a single vessel is not the same as reopening the artery of global energy trade.

Markets are discovering in real time that maintaining safe passage through a conflict zone requires persistent military protection and enormous logistical coordination.

And that brings us back to the core point that traders cannot ignore. Hormuz is not merely a shipping lane. It is the pressure valve of the global oil market. When the valve becomes unreliable, the entire system reroutes around it.

Pipelines, storage hubs, and tanker fleets start to behave like adaptive organisms seeking alternative paths of least resistance. What we are witnessing now is the market’s attempt to redraw its own map while the war continues to evolve.

In the short run, these workarounds are keeping prices contained. In the longer run, they reveal just how fragile the architecture of global energy trade really is. A few cheap drones, a handful of diverted tankers and suddenly the most important maritime chokepoint in the world transforms from a highway into a maze.

And that is why betting on a quick resolution is dangerous business. Wars may end with treaties, but risk premiums linger much longer. As long as the Strait of Hormuz remains vulnerable, the oil market will continue trading like a roulette wheel where every headline spins the barrel again.

That said, the oil volatility surface is clearly shifting, partly due to the calming effect of the IEA jawboning, the potential release of a large stockpile, and the quick rerouting of barrels around the Strait of Hormuz.

When the UK maritime security agency reported multiple cargo ships had been hit by projectiles on Wednesday, crude prices only briefly jumped near US$93 before retreating once it became clear none of the Greek-owned vessels still moving oil through the strait had been affected.

Earlier in the week, especially on Monday, that type of headline could easily have pushed crude toward US$140, which shows the market has shifted to a different balance point.

That said, the risk hasn’t disappeared. With B-52 bombers now arriving at an RAF base, the real concern is the next move may not be another shipping scare, but a much more forceful air strike that could rapidly reintroduce volatility into the market.

Corporate news in Australia

-Bingo CEO tells staff there is no fire sale, noting Macquarie Asset Management ((MQG)) is under no pressure to sell

-Better Beer is raising between $10m-$15m with a secondary sale possible for another $15m

-Blackstone is exploring a sale of Real Pet Food Co as shareholders push for a higher valuation

-Bendigo Bank ((BEN)) missed some client payments after a technology outage, adding to operational challenges following recent scandals

-Cygnus Metals ((CYG)) and Emperor Energy ((EMP)) have both launched equity raisings as difficult market conditions weigh on funding

-Estia Health is preparing for an IPO as owner Stonepeak moves ahead with plans to exit the aged care provider

-Longreach has provided a $40m funding facility to Melbourne fintech Co.Credit to help expand its loan book at lower cost

-AustralianSuper is pushing for regulatory changes that would allow pension funds to borrow and issue bonds to increase liquidity and investment capacity

-Blackstone views artificial intelligence as a pricing issue rather than a structural threat as it considers its acquisition of financial software firm Iress ((IRE)) amid uncertain markets

-South32 ((S32)) has emerged as the leading bidder for BHP Group’s ((BHP)) West Musgrave copper-nickel project as rising copper demand collides with high development costs

On the calendar today:

-NZ Q4 Manu Vol

-US Jan Trade Bal

-US Weekly Jobless Claims

-AUSTRALIAN CLINICAL LABS LIMITED ((ACL)) ex-div 3.75c (100%)

-AUSTRAL RESOURCES AUSTRALIA LIMITED ((AR1)) earnings report

-AUB GROUP LIMITED ((AUB)) ex-div 27.00c (100%)

-AUSTRALIAN VANADIUM LIMITED ((AVL)) earnings report

-ENDEAVOUR GROUP LIMITED ((EDV)) ex-div 10.80c (100%)

-EMBELTON LIMITED ((EMB)) ex-div 15.00c (100%)

-INFRAGREEN GROUP LIMITED ((IFN)) ex-div 0.50c (100%)

-INGHAMS GROUP LIMITED ((ING)) ex-div 4.00c (100%)

-KOGAN.COM LIMITED ((KGN)) ex-div 8.00c (100%)

-MCMILLAN SHAKESPEARE LIMITED ((MMS)) ex-div 62.00c (100%)

-MOTORCYCLE HOLDINGS LIMITED ((MTO)) ex-div 9.50c (100%)

-PEPPER MONEY LIMITED ((PPM)) ex-div 7.80c (100%)

-PERPETUAL LIMITED ((PPT)) ex-div 59c (100%)

-REGIS HEALTHCARE LIMITED ((REG)) ex-div 9c (100%)

-REGIS RESOURCES LIMITED ((RRL)) ex-div 15.00c (100%)

-REGIS RESOURCES LIMITED ((RRL)) ex-div 15.00c (100%)

-SKY NETWORK TELEVISION LIMITED ((SKT)) ex-div 12.82c

-SANTANA MINERALS LIMITED ((SMI)) earnings report

-SUMMERSET GROUP HOLDINGS LIMITED ((SNZ)) ex-div 9.45c

-SRG GLOBAL LIMITED ((SRG)) ex-div 3.00c (100%)

-SUPER RETAIL GROUP LIMITED ((SUL)) ex-div 32.00c (100%)

-VIVA ENERGY GROUP LIMITED ((VEA)) ex-div 3.94c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

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