The Overnight Report: Oil Up, Equities Down

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This story features A2 MILK COMPANY LIMITED, and other companies.
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Iran has retaliated for Israel’s attack on the South Pars gasfield by hitting Qatar’s massive LNG production facility. Oil prices have rallied in response.

SPI futures are indicating the local market is ready to run for the hills in response.

And also, the Federal Reserve decided not to make any changes while Jay Powell suggested inflation might now become a problem.

Good morning.

SPI futures are indicating a dark day ahead for the local market.

Iran has retaliated for Israel’s attack on the South Pars gasfield by hitting Qatar’s massive LNG production facility. Oil prices have rallied in response.

SPI futures are suggesting the S&P200 might well open -1.7% at the open on Thursday morning.

Danske Bank:

• The Fed maintained its monetary policy unchanged in March, as widely expected by both consensus and markets.

• Powell refrained from strong forward guidance but appeared more concerned about inflation than downside risks to growth. Median ‘dots’ remained unchanged, but the distribution shifted towards later cuts. 

• 2y UST yields shifted some 7bp higher, and EUR/USD declined back below 1.15. We still like our call for two more rate cuts from the Fed, but the timing remains highly sensitive to the length of the energy supply disruption.

The FOMC’s March statement was rather blunt about how the war in Iran is affecting monetary policy decisions for now, as the only new addition was: “The implications of developments in the Middle East for the U.S. economy are uncertain.”

Powell joked about the policymakers having even considered skipping publishing the summary of economic projections given how sensitive the outlook remains to the assumptions made about the war in Iran.

The GDP growth forecast was revised up (2.3% for 2027; Dec 2.0%) as was the median core PCE forecast (2.2% for 2027; Dec. 2.1%).

Under ‘normal’ circumstances, we would have seen such revisions as hawkish signals, but markets paid little attention for now. Not surprisingly, the risk assessment showed GDP growth risks tilting back to the downside and inflation risks equally to the upside.

Powell did not appear particularly hawkish, but he also avoided some of the dovish arguments he could have presented. In our preview, we speculated the negative growth impact from already tighter financial conditions could be an argument in favour of continuing rate cuts, but this was not even brought up.

UST yields shifted modestly higher and broad USD gained during the press conference. Powell underscored that a ‘meaningful’ number of participants had shifted their rate expectations in favour of later cuts, even if the median projection still foresees two more -25bp reductions.

He also emphasized the importance of tariff-driven inflation slowing over the course of this year.

On that topic, note that the February PPI released earlier today showed core goods prices rising at the fastest monthly pace since April 2022 – certainly a concerning signal in this light.

Even so, we still like our call of two more rate cuts. Markets price in only -17bp worth of cuts over the next year. Our pre-war baseline forecast has been for cuts in June and September, though the timing is not a high conviction call, and we will evaluate it as we gain more clarity on the scale and length of the energy supply disruption. 

Note that there was no discussion about the Fed’s balance sheet operations. We expect to see some guidance on the slowing of T-bill reserve management purchases in the meeting minutes.

The base case is that the net purchase volumes will decrease substantially after the mid-April tax date. 

ANZ Bank:

More central bank decisions to come: The ECB, BoJ and BoE meetings will be closely watched for assessments of the impact of higher energy prices on inflation and any hints on the future policy path.

Our expectation is that they will mirror the Bank of Canada by holding rates steady and signalling that well anchored inflation expectations give them time to assess how inflation will unfold.

Language will be important. We expect the ECB to adopt more proactive guidance, along the lines of “being prepared to respond as appropriate”, compared with the current “policy is in a good place”.

 We do not expect the ECB to hike rates this year, despite market pricing. Instead, we see rates on hold and think that well anchored inflation expectations, along with renewed weakness in the industrial sector, will act as a shock absorber.

The same applies to the BoJ and BoE. Affordability issues have meant consumer demand growth is weak, while uncertainty continues to weigh on investment demand.  

Aluminium prices retreated to USD3,336/t as investors assessed the impacts of the Middle East crisis on both supply flows and demand prospects.

The aluminium market remains unsettled by ongoing conflict, with some producers scaling back operations or suspending exports as shipments of metal and raw materials through the Strait of Hormuz have effectively ceased.

Most aluminium smelters only hold a few weeks’ supply of alumina, which could further tighten availability, given that the region provides around 20% of global ex-China supply. While buyers across Asia, Europe, and the US are scrambling to secure aluminium, stockpiles in China continue to build, tempering some of the bullish price pressures.

The price arbitrage in China is also supportive for exports, alleviating some of the supply risks. Copper prices continued to grind lower with prices falling to USD12,400/t. Rising inventories and weak offtake from manufacturers are weighing on prices.

Gold prices plunged to USD4,885/oz as rising energy prices are dashing hopes of the Fed easing rates. The market is pricing only one rate cut this year against earlier expectations of three rate cuts.

Andrew Grantham, CIBC Economics:

The Federal Reserve held its policy rate steady at 3.50-3.75% as widely expected, and said very little about the outlook ahead as policymakers buy time to assess how persistent (or otherwise) the recent oil price shock may prove to be.

Inflation continues to be described as “somewhat elevated”, while the implications of developments in the Middle East are simply described as “uncertain”.

The statement reiterated the FOMC was attentive to risks to both sides of its duel mandate, and only one member (Miran) voted in favor of a -25bp reduction in interest rates this time around.

Perhaps surprisingly given the increasingly uncertain global backdrop, the Summary of Economic Projections highlighted relatively minor changes compared with the last iteration back in December.

Indeed, GDP and unemployment forecasts for the end of the current year are either little or unchanged. The median forecasts for inflation are, understandably, higher, albeit by only two and three ticks for core and headline PCE respectively.

That could imply the majority of participants are factoring in a fairly short-lived spike in oil/gasoline prices with limited pass through to core price pressures.

That appears to fit in with the expected profile for interest rates, as median dot plot projections were unchanged from December and continued to point to one cut this year and a further reduction in 2027.

We currently forecast two rate cuts from the Federal Reserve during the second half of this year, which will bring rates down a neutral level, but that forecast also rests on the assumption that the ongoing conflict in Iran is fairly short-lived, meaning that gasoline prices will have moderated again by then and pass-through to core inflation will be limited.

deVere Group CEO Nigel Green:

The Federal Reserve will next cut US interest rates in September, and more likely October, and even that is far from guaranteed.

The data coming through is not consistent with easing in July. In fact, it points in the opposite direction.

Inflation is not falling fast enough. The latest wholesale inflation data shows prices rising at 3.4% year-on-year, the strongest pace in a year, and core measures are still running close to 4%.

And that’s before the full impact of the oil shock feeds through.

The geopolitical backdrop has shifted the policy landscape sharply. Oil prices have surged toward US$95–US$100 per barrel following the escalation of the Iran conflict, with US gasoline prices climbing to their highest levels since 2023.

Energy is now the dominant macro driver again.

A near 50% jump in oil prices in a matter of weeks will not stay contained. It feeds directly into transport, production, and consumer prices.

The Fed knows there’s a lag, and that lag is exactly why they will not cut prematurely.

Markets are still behaving as though inflation is under control. It isn’t.

Core inflation is running around 3.1%, and policymakers are now openly considering the risk that it stays closer to 3% even into next year.

Labour market data reinforces the case for patience rather than urgency. While hiring has softened, the unemployment rate remains relatively low at 4.4%, and wage pressures continue to circulate through the economy.

Employment conditions are not weak enough to justify rate cuts.

Yes, job creation has slowed and there was a loss of around -92,000 jobs in February, but the broader picture is still one of resilience. Policymakers don’t need to step in to support the labour market yet.

A stable labour market removes the justification for easing. It allows the Federal Reserve to focus squarely on inflation, and inflation remains too high.

Financial conditions also remain looser than policymakers would prefer. Equity markets have held up, credit remains available, and risk appetite has not materially reset despite elevated rates.

Markets haven’t fully absorbed the reality of restrictive policy.

Investors appear to continue to price in cuts as if they are inevitable and imminent. The reality is that policy is likely to stay tight for longer than expected.

The repeated delays in rate-cut expectations reveal a deeper misreading of the macro environment.

Expectations have shifted from March to June, from June to July, and now beyond.

Each shift isn’t random. It reflects the same underlying issue: inflation is sticky, and the economy isn’t weakening fast enough.

The risk environment is also becoming more complex. Rising oil prices are increasing the probability of stagflation, with sustained energy costs capable of lifting inflation while weighing on growth.

The Fed is facing conflicting pressures, but inflation remains the dominant threat.

Cutting rates into an energy-driven inflation cycle would risk repeating past policy mistakes.

There’s even a growing probability in market pricing of further tightening rather than easing in the near term. This tells you how dramatically the outlook has shifted.

 Investors must abandon the assumption that rate cuts are just around the corner.

The real story is not delayed cuts. It’s the possibility of no cuts for longer than markets are currently expecting.

Corporate news in Australia

-Takeovers Panel made a declaration of unacceptable circumstances in relation to buy now, pay later company Humm Group’s ((HUM)) disclosure of a $385m takeover proposal by Credit Corp ((CCP)) in December

-Novonix ((NVX)) shares fell after Nasdaq issued a compliance warning for failing to meet its minimum share price requirement

-ACCR appeals court ruling favoring Santos ((STO)) in greenwashing case

-ARN Media ((A1N)) has fired Kyle Sandilands and cancelled the show due to unresolved conflict with his co-host

On the calendar today:

-NZ Q4 GDP

-AU Feb Unemployment

-AU RBA Fin Stability Review

-JP BoJ rate decision

-EZ ECB MonPol Decision

-UK BOE MonPol Decision

-US FOMC rates

-US Weekly Jobless Claims

-A2 MILK COMPANY LIMITED ((A2M)) ex-div 8.32c (100%)

-ASTRAL RESOURCES NL ((AAR)) earnings report

-COCHLEAR LIMITED ((COH)) ex-div 215c (80%)

-CEDAR WOODS PROPERTIES LIMITED ((CWP)) ex-div 14.00c (100%)

-ENERO GROUP LIMITED ((EGG)) ex-div 1.00c (100%)

-IPERIONX LIMITED ((IPX)) AGM

-KELSIAN GROUP LIMITED ((KLS)) ex-div 5c (100%)

-MACMAHON HOLDINGS LIMITED ((MAH)) ex-div 0.95c (100%)

-SIGMA HEALTHCARE LIMITED ((SIG)) FY26 earnings report

-SPARK NEW ZEALAND LIMITED ((SPK)) ex-div 6.32c

-YANCOAL AUSTRALIA LIMITED ((YAL)) ex-div 12.20c (100%)

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

The Australian share market over the past thirty days…

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