LIVE MARKETS-Oil just right for Fed hawkishness

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OIL JUST RIGHT FOR FED HAWKISHNESS

Everything in markets depends on the oil price right now, both because of oil in its own right, and what it means for inflation and central bank policy, and BofA say that at the moment it is pointing to a more hawkish Federal Reserve.

The Fed, of course has a dual mandate, it has to target both inflation and unemployment, and market pricing has shifted meaningfully from expecting at lest two Fed cuts this year, before the war began, to now seeing no real movement.

And BofA see a risk the Fed actually hikes, even if it is not their base case.

In a Wednesday note, they explain: "If the conflict is resolved in short order, oil prices could fall significantly, allowing the Fed to reinstate its dovish bias. If the shock is very large, the Fed will likely turn even more dovish due to labor market concerns."

"But there is a range of outcomes - where the shock is sustained but moderate - such that the Fed would turn hawkish because it's more worried about inflation. We think oil prices have landed in that range for now."

The situation is arguably even more difficult for European and Asia Pacific central banks -- even if most don't officially have a dual mandate -- as the hit to both growth and inflation could be higher.

Arif Husain, head of global fixed income at T. Rowe Price, says in a note that he expects policymakers to err in both directions.

"Some central banks will likely hike when they should not – stifling their economies in the process. Others will look through the energy spike and could sit on their hands – leading to higher inflation expectations."
He sees the best opportunities in fixed income in cross-market positions looking at front end rate differentials.

(Alun John)

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