The market is sensing that energy prices will stay higher for longer as the US and Israel struggle to define a plan for peace and reopening the Strait of Hormuz.
Trump today in a Truth Social post said it would be easy to re-open the strait and that the US was prepared to do it alone. The market doesn't believe it as Brent crude oil is now up $4 to $112.68. There is also a crunch in natural gas, fertilizer, sulpher and other goods that normally flow from the area.
With that, US 12-month inflation breakevens are now up to 5.3%. That's a potentially crushing number of the US economy as it would almost certainly force the Fed to hike rates.
That's the highest level since March 2023 and comes in stark contrast to the disinflationary impulses we saw in December.
It truly looked like the Fed was on its way to conquering inflation and now that's all come undone.
Earlier today, we got comments from Fed Governors Waller and Bowman that sounded like they were throwing in the towel on rate cuts, at least if the current energy regime continues. A year of +5% inflation would be badly damaging to the Fed's credibility as they haven't achieved their target at any point this decade.
In terms of the Fed curve, there are now 7 bps of hikes priced in through December. That's a dramatic reversal from in February when pricing was for 60 bps of easing in that time frame.
