Earnings Call, Conference Presentation, Fireside Chat
Ceasefire, rates and the US consumer
Bank of AmericaRalf Preusser, Bruno Braizinha, Sophia Salim, David Tinsley, Sfia Salim, Bruno Brasenia
- The market is expected to price in at least two ECB rate hikes for this year, with inflation projected to remain above 2% through 2027 despite the possibility of a ceasefire, as energy price shocks and negotiation uncertainties persist.
- Under a de-escalation scenario in April, oil prices could average $100 per barrel and Dutch TTF gas prices could rise toward €90 per megawatt, driven by potential permanent damage to energy supply infrastructure.
- Bond yields are forecast to potentially decline to 2.9% in 10-year bonds if pricing adjusts to two ECB hikes, with further declines to 2.7% possible beyond 2026 as the ECB implements rate cuts next year.
- The German yield curve currently exhibits a steepness of approximately 15 basis points relative to global peers, with market positioning indicating long two-year contracts and short 10-year contracts via Eurex futures.
- Volatility in Euro markets remains elevated compared to pre-war levels and is currently skewed relative to US volatility, though a shift toward a relative underperformance of Euro volatility versus dollar volatility is considered attractive as risk pricing lags.
- While volatility is expected to be cautiously lower following a ceasefire, it is not projected to return to the low, complacent carry levels seen earlier in the year due to anticipated higher uncertainty in the second half of the year.
- A return to a pre-war long carry environment is contingent on negotiations establishing a credible path for peace that meaningfully reduces the likelihood of the conflict escalating.
- US consumer spending growth in March was 3.2% excluding a 16% spike in gasoline, with average tax refunds up 12% year-over-year providing a tailwind directed primarily toward necessities.
- Spending patterns reflect a K-shaped recovery where higher-income consumers grew at roughly 4% compared to 2% for lower-income consumers, with discretionary spending declining only for the latter group.
- Significant impacts on consumer behavior regarding gasoline prices are expected to materialize months away, contingent on tax refunds and stimulus measures diminishing while gas prices remain high.
- US car spending growth including gas reached 4.3% year-over-year in March, a one percentage point increase from February, with recent strength driven largely by volume growth rather than price increases.
- Midterm elections introduce bifurcation scenarios requiring market pricing, while a persistent weakness among lower-income consumers could eventually influence political dynamics.