Nordea’s Jan von Gerich notes that despite intense Middle East headlines and large market swings, Oil has not broken to new highs in recent weeks, while German yields have surged and equities weakened. He highlights that Nordea’s baseline assumes easing conflict and limited lasting impact on energy prices, though the probability of this benign scenario has clearly fallen.

Energy markets central to policy outlook

"Despite wild swings, the oil price has not made new highs in almost three weeks. The German 10-year yield, in turn, hit its highest level since 2011 earlier this week, while equity markets have continued to feel pressure."

"Our baseline has assumed that the conflict will ease soon and thus that a more permanent effect on energy prices would be limited, but the likelihood of such a scenario has clearly declined."

"Based on Lagarde’s comments this week at the ECB Watchers Conference, the ECB seems particularly worried that since the previous inflation shock took place so recently, the inflation expectations of economic actors may be more sensitive to another increase in energy prices."

"Further, Lagarde cited studies showing that the impact of energy shocks is non-linear in nature, meaning smaller shocks will not have a meaningful impact on broader prices, whereas large shocks can have a significant impact, which may call for a forceful monetary policy response."

"In the words of the ECB, the war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth. Its medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)