Hormuz Blockade Rattles Markets (09 - 13 March)

Global sentiment was dominated this week by the second week of the war with Iran and the effective blockade of the Strait of Hormuz, driving Brent crude prices above $100/barrel. Despite a catastrophic US labor report showing a loss of 92,000 jobs in February, safe-haven demand pushed the US Dollar Index to 99.1. The energy shock has ignited fears of "stagflation," particularly in Europe and Japan, as soaring fuel costs threaten to reverse recent disinflationary trends.

Fixed income markets saw a violent repricing; the UK 10-year gilt yield surged over 40 basis points in its largest weekly rise since 2022. While the US labor market shows signs of significant distress with unemployment hitting 4.4%, the inflationary pressure from oil is complicating the Federal Reserve's path, with traders now eyeing July for potential rate relief.

Market Drivers & Catalysts

• Energy Supply Paralysis: The Strait of Hormuz blockade has forced producers like Kuwait, Iraq, and the UAE to cut output as storage hits capacity. Iraq’s southern production plummeted 70% to 1.3 million bpd.
• Israel-Iran Escalation: Strikes in Beirut and expanding military operations have funneled capital into the dollar and away from energy-dependent currencies like the euro and yen.
• US Labor Market Shock: The unexpected loss of 92,000 payrolls, the sharpest fall since October, contrasts sharply with a strong ISM Services PMI of 56.1, suggesting a widening gap between sector performance.
• European Inflation Rebound: Euro Area inflation rose to 1.9%, with core services climbing to 3.4%, prompting markets to price an 85% probability of an ECB hike by December.
• Japanese Intervention Risk: With the yen near 157.5, Finance Minister Satsuki Katayama has signaled readiness to intervene as rising import costs strain the resource-poor economy.

Fixed Income

• US 10 Year Treasury Note Yield: Rose to 4.16%. The yield recovered from earlier lows as the "inflation tax" from $100 oil outweighed the dismal payroll data. Markets are now split on whether the Fed will pause or cut twice by year-end.
• UK 10 Year Bond Yield: Surged above 4.6%, the highest since October. Investors are bracing for a prolonged period of elevated inflation, effectively erasing hopes for a near-term Bank of England rate cut.
• Japan 10 Year Government Bond Yield: Rose to 2.15%. A strong 30-year bond sale (yielding 3.4%) and warnings from Governor Ueda regarding the conflict's economic impact have kept yields on an upward trajectory.
• Germany 10-Year Bond Yield: Climbed to 2.87%, a weekly rise of 23 basis points. Markets now assign a 55% chance of a July rate hike as the ECB grapples with energy-driven price pressures.

Commodities

Gold fell to $5,118/oz. Despite the geopolitical chaos, a stronger dollar and the prospect of delayed Fed rate cuts (due to oil-led inflation) pressured the metal.

Silver declined over 1% to below $84.5/oz. Similar to gold, the "higher-for-longer" interest rate fear sparked by triple-digit oil prices has capped the upside for non-yielding assets.

Currencies

• U.S. Dollar Index (DXY): Declined slightly to 99.1 on Friday post-payrolls but gained 1.5% on the week. It remains the preferred hedge against Middle Eastern instability and European energy vulnerability.
• Euro: Fell to $1.156, its lowest since November. High energy dependence and the threat of a "win-lose" inflationary spike have weighed heavily on the single currency.
• British Pound: Declined toward $1.33. Weakening growth forecasts (lowered to 1.1% for 2026) and escalating tensions have pushed sterling to its weakest level since early December.
• Japanese Yen: Traded near 157.5. The yen is facing a third straight weekly loss as Japan’s reliance on energy imports makes it a primary victim of the current oil price surge.

Economic Data Highlights

• US Non-Farm Payrolls (Feb): The economy lost 92,000 jobs, far missing the +59,000 forecast. Significant losses occurred in healthcare (-28K), information (-11K), and manufacturing (-12K).
• US Unemployment Rate (Feb): Rose to 4.4% (from 4.3%). The number of unemployed persons increased by 203,000 to a total of 7.57 million.
• Euro Area Inflation (Feb): Rose to 1.9%. Services inflation (at 3.4%) and a rebound in core inflation to 2.4% have put the ECB back on a hawkish footing.
• US ISM Services PMI (Feb): Rose to 56.1, the fastest expansion since 2022. New orders surged to 58.6, though the Prices Index remained high at 63.
• US WTI Crude: Approached $88/barrel, the highest since September 2023, following political demands for Iranian surrender and Gulf production warnings.

Macro Calendar Highlights

• U.S. Consumer Price Index (CPI) - February
• European Central Bank (ECB) Policy Meeting
• Bank of Japan (BOJ) Governor Ueda Speech
• U.S. Retail Sales Summary
• IEA Monthly Oil Market Report