Market Talk: Lower oil prices ease pressure on the ECB

Central bankers meet in Sintra but have falling energy prices given them some relief. The unexpectedly fast drop in energy prices over the last week has taken pressure off the ECB to lift rates as soon as next month, sources have told Reuters, as the world's central bankers meet in Sintra for its annual forum. At the ECB's last meeting, the focus was on trying to prevent the oil price spike caused by the Iran war from pushing inflation up across the economy, but shortages of refined products like jet fuel haven't materialised and oil markets didn't react strongly to renewed air strikes over the weekend, so can ECB policy makers relax? Tim Graf is head of macro strategy at State Street. Tim, how much has the recent drop in energy prices eased pressure on the ECB? Probably a little bit. The immediacy of needing to go next meeting, as you alluded to, is probably very much lessened because it does lower the probability of second round effects, which were still, I think, ever present. You still have core inflation above target, or at least modestly so. So there is still a case to be made that maybe some further tightening is needed. But as I say, I think the main thing is that it just reduces the urgency with which that's done. You see there's a case to be made for further tightening. When are you expecting them to act now? Markets are pricing before the end of the year, one more hike. I think that's reasonable. I would think probably maybe the most likely trajectory is skip a meeting and then go and then wait and see if you need to do any more. I suspect they won't. They're referring to this as not being an insurance hike, but really, it kind of is. And I think they'll maybe take out some more insurance in the next – the meeting after the next one, I should say, just given it's already priced for. Do lower energy prices also change the outlook at the Fed? Not as much because core inflation, or at least the super core measure that the Fed prefers to use, is still much more elevated relative to target. And I think here, especially given some of the disappointments in the labor market we were starting to see at the background, we've had some pretty decent payroll reports over the last three months. The expectation is that we get another decent report this month. And if we continue to see numbers like what we're seeing on non-farm payrolls, unemployment might start to fall soon. When that's happening and you have super core inflation above the Fed's target, it's really difficult to not think about rate hikes. New Check Evan Walsh makes his first appearance on the international stage this week in Sintra. What are markets listening out for, do you think? Anything, really. He's been so kind of vague and non-committal in a lot of his remarks, other than he's committing to talking less, I think, and to not giving projections as part of the summary of economic projections. So I think they'll hang on his every word, of course, because so far what we've heard is very little in terms of the direction of policy. What they will actually get is probably similar to what they got at the last Fed meeting, which was not very much. The Supreme Court ruled yesterday that President Trump cannot fire Fed Governor Lisa Cook. Does this ruling put the market's worries about the Fed's independence to bed? I think a lot of those were assuaged over recent months when it was looking like this was going to be the outcome. So in terms of an immediate impact, no, I don't – I think most of the good news on that is in the price. And we're kind of long past the point at which Trump could have potentially packed the Fed president's seats with picks of his own choosing should this decision had gone his way. So I don't think that was ever really a risk the market was worrying about. And so maybe you get some residual relief. But by and large, this has been in the price. And as you mentioned, we also get a payrolls number this week. Could a particularly hot jobs report make the market nervous again about further hikes to come? Yeah, for sure. I mean, the market has already priced quite a lot for the Fed over the coming six months or so, at least a lot relative to what is realistic. The Fed is very much in wait and see mode to see if we continue to get these improvements. But yes, another decent number, and especially one that, as I said before, ultimately lowers the unemployment rate a tenth or even two tenths over the coming couple of months. Those conversations will start to get a lot more serious, I think. That was Tim Graf of State Street. Don't forget you can watch more videos on Reuters.com.