Hawkish Central Banks Meet Geopolitical Tensions as Crude Prices Remain Soft

The global financial landscape is being shaped by two key threads: a hawkish central bank cycle and geopolitical tensions. The first thread suggests that central banks' decisions to hike interest rates are being reinterpreted as a sign of commitment to inflation targets, rather than a threat to economic growth. This has led to a calm market reaction, with bull flattening at the long end of the yield curve.

This pattern is evident in the expected Federal Reserve (Fed) hike and the Bank of Japan's (BoJ) decision to raise interest rates, despite two reflationist dissents. Historically, episodes where hikes are absorbed alongside falling yields and rising equities have persisted until the next inflation print tests the narrative.

The geopolitical thread, however, cuts in the opposite direction. The threat of escalation between a sitting president and an oil producer, combined with tanker incidents in Hormuz and pipeline damage, has previously embedded a war premium in crude prices.