Deutsche Bank points out that Brent crude oil rose 6.63% last week to $94.39 per barrel, and more noteworthy is the simultaneous rise in the forward curve. 12-month Brent futures rose to $79.16 per barrel on Friday, a two-month high, approaching the previous high of $83.58 per barrel during the Iranian conflict in May. The market is re-indenting the risks of a prolonged closure of the Strait of Hormuz and persistently high energy prices.
This concern has already translated into inflation pricing. The US 1-year inflation swap rose 34.5 basis points last week to 2.24%, the largest weekly increase since March; the Eurozone 1-year inflation swap also rose 25 basis points to 2.71%. During the same period, the 10-year US Treasury yield rose 4.2 basis points to 4.73%, and the 10-year German bond yield rose 5.4 basis points to 3.26%.
This means that the energy shock is spreading from spot prices to inflation expectations for the next year. The Ministry of Finance's expansion of long-term bond repurchases can alleviate yield pressure in the short term, but as long as the forward oil price curve remains high, the bond market will still need to price in higher inflation uncertainty.
