Investment Institute

Snake Oil

  • 23 October 2023 (7 min read)

  • Powell’s cautious words did not tame the bond market
  • These days, high oil prices come with a strong dollar. That’s a double whammy for European inflation
  • We expect a quiet ECB Governing Council

Despite Jay Powell’s cautious words last week, US long-term yields were at the end of last week still close to 5%. Even if the Fed Chairman’s words triggered a downward revision of market pricing for Fed Funds for the remainder of this year, the long end of the curve seems to be increasingly detached from the expected short-term trajectory for monetary policy. The market may have taken on board the notion that the US neutral rate is now higher. This would reduce the capacity of the Fed to influence long-term yields.

The resilience of the US economy now extends to how it reacts to international energy shocks. Of course, higher oil prices affect US consumers, but since the US has turned into a net exporter of fossil fuel, contrary to the Euro area this does not result in a deterioration in the terms of trade. This has contributed to the reversal of the correlation between oil prices and the dollar exchange rate. It used to be negative – rising oil prices coincided with a weaker dollar. It is now positive: the US dollar thrives despite elevated oil prices. This adds to the constraints weighing on Europe: a stronger dollar adds to the inflationary pressure triggered by energy costs.

The risk of another push in oil prices would affect the Euro area at a moment when its energy-intensive sectors have not yet recovered, their output still below the level seen before the pandemic, unlike in the US. This highlights the need to provide consumers with more visibility on energy costs. The deal on the reform of the EU electricity market last week brings some progress on this front.

We do not expect much from the ECB Governing Council meeting this week. A pause had been clearly telegraphed after the 25-bps hike in September and given heightened uncertainty the ECB is unlikely to want to “rock the boat”, including on balance sheet issues, even if we don’t exclude a small move on mandatory reserves.

Download full article
Download report (575.89 KB)

Related Articles


What will it take?


Letter from China


Saved by Supply


    This website is published by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation or particular needs of any particular person and may be subject to change without notice. Please consult your financial or other professional advisers before making any investment decision.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future performance.

    Some of the Services and/or products may not be available for offer to retail investors.

    This publication has not been reviewed by the Monetary Authority of Singapore.