Daily Commentary

MarketMinder’s View: This piece runs through several potential second-order effects of the Strait of Hormuz’s blockage, warning they are already in motion and will bite developed world economies over the next several months—hitting the UK particularly hard—even if the Strait opens soon. Those include shortages of jet fuel, fertilizer and chemicals along with a higher risk of global shipping bottlenecks if countries bordering other chokepoints decide to get adventurous. While that last one seems far-fetched, as it rests on offhand comments from a single Indonesian official that the government immediately dismissed, the others are reasonable things to keep in mind. While most attention centers on the Persian Gulf’s oil and natural gas exports, the region is also a key source of fertilizer and chemicals, both of which are gas byproducts. Shipping blockages today will probably work their way through the supply chain gradually. However, it seems a bridge too far to extrapolate severe economic trouble from this—particularly severe trouble markets haven’t already discounted, as these issues are well known. We have seen this movie before, though few recall it now. In 2022, when Russia invaded Ukraine, it triggered supply fears beyond oil and gas. There were grain shortage fears. Headlines warned the noble gases used in semiconductor production would be in short supply, given Russia and Ukraine were key suppliers. That was going to cause a massive global chip shortage, allegedly. And fertilizer and chemical concerns loomed large, too, especially with gas shortages threatening Germany’s chemical plants. And what happened? Seeing these potential looming roadblocks, the world adapted. The widely feared global food price spike never occurred. Semiconductor producers adjusted. In this case, even if the Strait isn’t opened, workarounds like shipping via truck will help to mitigate the issues. That same resilience is alive today, likely rendering the worst fears false.

MarketMinder’s View: Following the Reserve Bank of Australia’s lead, Norway’s central bank (the Norges Bank) hiked its policy rate from 4.00% to 4.25% Wednesday, the first hike since the global cycle in 2023. It is a curious and potentially wrongheaded move, in our view. The bank cited several factors, including above-target inflation, a tight labor market and uncertainty over the Iran war’s effects on the economy and inflation. On the latter, Norway is a beneficiary of higher oil prices, as the energy-heavy economy is among Europe’s chief suppliers of oil and gas. This is a main reason why Norway was among the world’s best-performing equity markets during the war-driven mini-correction. Now, you may say the bank is perhaps looking beyond the energy industry to mainland Norway’s economy. Fine. But here is the thing: With Norwegian 10-year bond yields at 4.41% (per FactSet), hiking rates to 4.25% means you have among the world’s flattest yield curves. Since banks borrow short-term to lend long—making the spread a proxy for new loans’ profitability—this dissuades lending and credit creation, which would largely put the brakes on non-energy industry investment and hamper the economy’s growth. It is a counterproductive move. As for the rest of the rationale, inflation has been above target for years, as the article admits. Wage growth also matched the bank’s estimates. So that part of the rationale looks like cover for a curious, war-driven decision. Now, Norway is a tiny economy and the effects of one hike there—or even several—are likely limited, globally speaking. But central banks often act in concert and we are watching decisions like this closely as a result.

MarketMinder’s View: According to the New York Fed’s latest Survey of Consumer Expectations, Americans aren’t overly worried higher energy prices will keep inflation elevated for long. “Respondents to [the survey] said that as of last month, they expected to see inflation a year from now at 3.6%, a modest rise from the 3.4% seen in March. Expected inflation at the three- and five-year horizons, however, held steady at 3.1% and 3%, respectively.” Key to this? Easing future gas price expectations, with the year-ahead projection falling from March’s 9.4% y/y reading to 5.1% last month. To us, this suggests consumers are starting to move past the widespread oil and gas price supply fears that surged at the war’s outset. Perhaps they are seeing governments’ and corporations’ various responses to keep supply flowing amid Strait of Hormuz blockages. Maybe they have noticed higher energy prices aren’t leaking into prices at other retailers. Who knows. But this is evidence of thawing sentiment worth noting. The article scoffs at this, suggesting these responses cut against other data “showing rising inflation pressures” ahead. But hold on. While oil and gas prices remain elevated, that doesn’t guarantee higher inflation. As we have noted time and again, inflation is a monetary phenomenon of too much money chasing too few goods and services. Thing is, US M4 (money supply) growth is at prepandemic levels (per the Center for Financial Stability), which minimizes businesses’ pricing power. Even if they might want to pass higher costs to consumers, without surging money supply, they generally can’t. We don’t see much evidence of these so-called rising inflation pressures—especially over the longer term, as the global economy continues adapting to wartime disruptions.