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US Inflation, Red Sea, and Ecuador In Focus

Forecasts for market inflation, possible implications on monetary policy from Red Sea tensions, and continued violence across Ecuador.

As markets continuing to keep a close eye of geopolitical developments in the Middle East, considerable attention will also be paid to US inflation figures at 1330 this afternoon.

Here, markets are forecasting headline inflation to rise 10bps from November’s level to 3.2%, indicative of how the Fed continue to face headwinds in brining inflation down to their 2% target. This comes as core inflation is expected to hit 3.8%, and though this would represent a 0.2 percentage point drop from last month’s print, shows the prevalence of ‘sticky’ inflation in the worlds largest economy.

With markets continuing to make assessments on the extent of the Fed’s monetary loosening this year, any deviation in today’s CPI print from the market consensus could see such assessment change. As we looked at earlier this week, there continues to be a gulf between implied market expectations of the Fed’s monetary loosening over 2024, and the guidance from the FOMC. For example, while the FOMC have indicated 75bps worth of cuts this year, implied market expectations are signalling double this level at 150bps. Hence, markets will be keeping a close eye on today’s CPI figure and how it may alter interest rate expectations moving forward.

Red Sea

Yesterday, the Governor of the Bank of England, Andrew Bailey, gave his assessment on possible implications of the Red Sea vis-à-vis monetary policy. Speaking to the Treasury Select Committee, he stated that “As best we can tell from the monitoring, shipping traffic is being affected and has been rerouted and that will increase shipping prices and shipping costs”. Accordingly, he indicated that “initially that will be an issue in the monetary policy world” as inflationary pressures feed into the economy.

This comes as global shipping giants divert cargo vessels from the Red Sea-Suez route to around the Cape of Good Hope, adding an additional 3,500 nautical miles to each journey and around £1.6m to each vessels’ journey. With some 12% of global shipping passing through the Red Sea area each year, the impact of a protracted crisis in the region is hard to understate. With longer journey’s, a stretch on supply, and higher insurance premiums, Drewry’s World Container Index increased by over 60% to $2,670 per 40ft container this week. Indeed, According to Drewry, prices are now 88% higher than average 2019 rates of $1,420, which serves as a pre-pandemic benchmark.

Furthermore, given that some 8% of global LNG supplies travel through the Red Sea, in addition to a 10% of the world’s oil, further disruption in the Red Sea could raise supply side fears across wholesale energy markets leading to higher domestic prices in the UK.

Ecuador

Violence continues to engulf Ecuador as government forces and gangs clash across the country. Following days of unrest, Ecuador’s President Daniel Noboa has mobilised units of the armed forces to try to restore order.

Last Sunday, Noboa ordered police into the notorious La Regional prison which housed Adolfo Macías Villamar – leader of the Los Choneros cartel – to be moved to another region of the prison. However, given that Villamar’s prion was seen to be empty during the operation, speculation mounts on his whereabouts. His escape, acted as the catalyst for the recent violence, which has now resulted in a nightly curfew being put in place.

With no sign of the violence letting up, fears are mounting over the current state of security across the country.