Daily Insight
Group Economics Macro & Financial Markets Research Georgette Boele & Peter de Bruin
Oil lifts inflation expectations
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8 May 2015 • • •
Inflation expectations have played a role in the recent dramatic market moves… …however we expect oil prices to soften in the near term dampening inflation expectations Widening yield spread have supported EUR/USD for now
Recent dramatic moves in financial markets…
Oil prices drive inflation expectations
The recent sharp rise in bond yields in Europe and in the US
Eurozone inflation expectations
has puzzled analysts across the globe. Explanations are
Brent oil price
2.20
120
ranging from profit taking, abandoning risk aversion trades, thin market conditions, lack of buyers and higher oil prices
110 2.00
100 90
pushing up inflation expectations. There is probably not one single explanation.
1.80
80 70
1.60
60
…influenced partly by higher oil prices Since the low set in January Brent oil prices have risen from USD 46.6 to 68.2 per barrel, or more than 46%. This is a significant move, but it is dwarfed compared to aggressive sell-
50 1.40 Jul 14
40 Oct 14 Eurozone 5y5y (lhs)
Jan 15
Apr 15
Brent oil price (rhs)
off in the period July 2014 until January 2015. This recovery in oil prices has pushed up inflation expectations 5 years ahead
Source: Bloomberg, ABN AMRO Group Economics
in Europe (see graph) and in the US. In general, higher inflation expectations are positive for gold prices, which are
The Norges Banks keeps policy on holds...
often seen as an inflation hedge. However, this time around
Yesterday, the Norges bank left monetary policy rate
gold prices have been under pressure. Why is this? The rise in
unchanged at 1.25%. It stated that developments in the
bond yields has outpaced the rise in inflation expectations. In
Norwegian economy have so far been broadly in line with
short, real yields have moved higher and this is negative for
March projections. The Norwegian krone strengthened after
gold. In general, higher yields (especially real yields) are
the decision as the likelihood for further easing is lower now.
negative for an asset like gold that yields zero or almost nothing. In the near term, we expect oil prices to decline, as
…while the Czech central bank will continue to use the
markets will realise that supply is still ample. This will likely
koruna as policy instrument
dampen inflation expectations going forward.
Meanwhile, the Czech central bank reiterated its intention to use the koruna exchange rate as an additional instrument for
Widening yield spread supports EUR/USD
easing monetary policy conditions. The bank has already
The more substantial increase in Bund yields compared to US
brought its policy rate to a technical zero, and relies on the
Treasury yields and the improvement in investor sentiment
exchange rate as an addition monetary policy tool. It confirmed
towards the eurozone have given strong support to EUR/USD.
its commitment to intervene on the FX market if needed to
It is likely that weaker-than-expected US data releases
weaken the koruna so the exchange rate of the koruna is kept
weighed on US Treasury yields as well as on the dollar. Strong
close to CZK 27 to the euro. It stands ready to intervene
US economic numbers ahead, starting with today’s US
automatically. The Czech economy, as the Polish economy,
employment report, will most likely result in a more positive
will benefit from the upswing in the eurozone, its main trading
spread behaviour for the US dollar.
partner, and an improvement in its labour market. This should underpin growth and help inflation to eventually pick up again.