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Futures market thinks the price of oil will recede significantly over the next six months

Michael J. Moran

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As widely expected, energy prices surged in March, with the increase of 8.5% among the firmest in the history of the series. A reading in August 2023 was close (8.4%), and the increase in June 2022 was a touch firmer (8.9%). Only the June 2020 observation was decidedly stronger at 9.6%. (Data on the current version of the PPI begin in 2010.) The jump in energy prices pushed the headline index 0.5% higher, an uncomfortable reading but better than expectations in the market, which clustered in the range of 0.8% to 1.2%.

March represented the third consecutive month with a headline increase of 0.5%, and the advances in the prior two months were not entirely due to energy. Prices excluding food and energy also rose 0.5% in January and February (and December as well), which might stir thoughts of accelerating inflation.

However, pressure outside of energy cooled in March. Food prices fell 0.2% and prices excluding food and energy rose only 0.1%. Service prices, which rose an average of 0.6% in the prior three months, increased less than 0.1%. The modest changes outside of food and energy raised the prospect that an upward trend that seemed to be developing might now be fading. The March change, alone with a less-than-troubling increase in February, led to a downward tilt in the six-month moving average of core price changes (chart, below left).

All of the prices in the headline PPI and its components are final prices – that is, prices paid by the ultimate buyer of goods and services. For goods, the products involved will not undergo further processing. The full report on producer prices also includes price indexes for intermediate inputs. These indexes could provide clues on what might unfold for finished goods in months ahead. This obscure part of the PPI also offered a hint of encouragement.

Input prices for stage four production (i.e. the final stage of the production process) rose 0.5% in March. The increase, while hefty, was slower than the results in the prior two months and it stabilized the upward trend in the six-month average (chart, below right). The input price indexes should be interpreted cautiously because they tend to be more volatile than those for finished goods, but with broad-based cooling in March, this measure might have signal value in this instance.

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- Energy prices surged in March, but most other items showed modest changes.
- Tame readings were a relief from hints of upward pressure in prior months.

March PPI: Tame Excluding Energy

Robert Brusca

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Japanese industrial production in February declined by 1.1%, led by a 2.1% drop in manufacturing output. By sector, consumer goods output fell by 0.3%, intermediate goods output fell by 2.1%, while investment goods output dropped by a strong 2.5%, all on a month-to-month basis. Mining sector output fell by 1.5% in February, while utilities output fell by 3.8%.

Sequentially, however, Japanese output had been accelerating, up by 0.1% over 12 months, at a 4.5% annual rate over six months, and at a 7% annual rate over three months.

**Manufacturing**
Manufacturing output is up at 0.3% over 12 months, at a 6.6% annual rate over six months, and by 11.7% annualized over three months.

Within manufacturing, consumer goods output is expanding at a strengthening pace, rising by 0.8% over 12 months, at a 4.8% annual rate over six months, and then at a 10.8% annual rate over three months. Intermediate goods output is flat over 12 months, rising at a 2.9% annual rate over six months, and at a 6.2% annual rate over three months. Investment goods output is up at a 7% annual rate over 12 months, at a 5.2% annual rate over six months, and at a 6% annual rate over three months. However, mining output is down year-over-year; output changes get progressively worse from 12 months to three months. Utilities show a 4.8% decline over 12 months, decline by 3.2% at an annual rate over six months, and then fall at a 4.7% annual rate drop over three months. Mining and utilities sectors are experiencing more in the way of contracting effects.

**Quarter-to-date**
Reported on a quarter-to-date basis (two months into Q1), total industry output is up at a 7.3% annual rate, with manufacturing up at a 15.2% annual rate on the same basis. For sectors, however, the strength is in consumer goods and investment goods where output is increasing at an 11.9% annual rate in the quarter; intermediate goods output is up at a 9.3% annual rate quarter-to-date. Mining output shows a decline at an annual rate in the quarter-to-date, while utilities output posts an increase.

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**The trends are good...but**
The trend data provide an upbeat assessment for Japanese output despite the setback in February. However, we know this isn't going to last. The global economy has run into a buzz-saw since then. Global PMI survey data took a sizable step back in March as the war with Iran began, and with oil prices spiking, all past trends are basically off the books, and we have to recalibrate everything. What we can see is that the Japanese economy was on a run and was doing better. It was beginning to make inroads before the Iran war took place.

Japan has a history of locking up oil supplies long in advance, so the economy may continue to have more resiliency to oil prices than other economies and compared to what people expect. On the other hand, if Japan has contracts to supply oil at a price and supplies cannot get out of the Middle East, those contracts may not count for much. However, there still are going to be perceptions and expectations for the future and concerns about what's going to happen to global demand—nobody is out of the woods yet. For now, trend-based data in Japan look extremely good; however, we know not to believe it will last. At this point, we're not sure what to expect next, except something that will be much worse.

Japan

Japan’s IP: A Step Back in February

Winnie Tapasanun

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Existing home sales fell 3.6% m/m (-1.0% y/y) to 3.98 million units (SAAR) in March, the lowest level since June 2025, following a 2.7% rebound to 4.13 million in February (previously +1.7%; 4.09 mil.), according to the National Association of Realtors (NAR). The Action Economics Forecast Survey had expected March sales of 4.08 million units. Sales remained 38.1% below a high of 6.43 million in January 2022 and 39.7% below a peak of 6.60 million in January 2021. The March fall coincided with an increase in the average 30-year fixed mortgage rate to a three-month-high 6.18% in March after declining to 6.05% in February, according to Freddie Mac. The sales figures are based on closings of sales contracts signed over the past couple of months.

Existing single-family home sales fell 3.5% (-0.3% y/y) to 3.63 million units in March, the second m/m fall in three months and the weakest reading since June 2025, after a 3.3% increase to 3.76 million in February. Sales of condos and co-ops slid 5.4% (-7.9% y/y) to 350,000, the fourth m/m slide in five months and the lowest level since May 2020, on top of a 2.6% February fall to 370,000.

By region, March existing home sales declined m/m across all major regions. Sales in the Northeast dropped 8.5% (-12.2% y/y) to 430,000 in March after a 6.0% decrease in February, marking the third consecutive m/m fall and a record low. Sales in the Midwest fell 4.2% (-3.2% y/y) to 920,000, the lowest reading since September 2024, reversing a 3.2% February increase. Sales in the South slid 3.1% (+2.2% y/y) to 1.86 million after a 3.2% February rise. Sales in the West fell 1.3% (+1.3% y/y) to 770,000 following a 6.8% February rebound. The Midwest, South, and West each posted the second m/m decline in three months. Notably, the South remained the dominant region, accounting for 46.7% of total U.S. existing home sales.

The median price of all existing homes (NSA) rose 2.7% (1.4% y/y) to $408,800 in March, the highest since November, following a 0.8% increase to $398,000 in February (unrevised) and three successive m/m declines. Prices were 5.5% below a high of $432,700 in June 2025 but 13.3% above a low of $360,800 in January 2023. The median price of an existing single-family home grew 2.5% (1.3% y/y) to $412,400 in March, the highest since November, after a 1.0% rebound to $402,300 in February. The median price of condos and co-ops, up for the third time in four months, climbed 4.8% (2.3% y/y) to $371,500, the highest since June 2025, following a 2.9% February drop to $354,400. Regionally, overall prices rose m/m in March in the Midwest (+3.8%; +4.9% y/y), Northeast (+3.5%; +5.7% y/y), West (+2.7%; -1.3% y/y), and South (+1.7%; +0.8% y/y).

Inventories of homes for sale increased for the third consecutive in March. The number of existing homes for sale (NSA) rose 3.0% (2.3% y/y) to 1.36 million units, the highest level since November, following a 4.8% February rise to 1.32 million. The supply of homes on the market at the current selling rate (NSA) rose to 4.1 months, the highest in four months, after holding at 3.8 months in February and January. The recent high of 4.6 months was in August 2025, while a record low in supply of 1.6 months was in January 2022.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. Mortgage interest rates can be found in the **WEEKLY** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.

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- March sales -3.6% m/m to lower-than-expected 3.98 mil.; -1.0% y/y, fifth straight y/y decrease.
- Broad-based regional m/m declines: Northeast (-8.5%), Midwest (-4.2%), South (-3.1%), West (-1.3%); y/y sales up in the South and West but down in the Northeast and Midwest.
- Median sales price +2.7% (+1.4% y/y) to $408,800, highest since November.
- Unsold inventory +3.0% (+2.3% y/y) to four-month-high 1.36 mil. units; 4.1 months' supply.

U.S. Existing Home Sales Drop in March to a Nine-Month Low

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As the chart makes clear, Dutch exports and imports are driven by very complementary forces and tend to track one another closely. Both flows boomed when COVID ended, slowed to a contraction in 2023, and then recovered to maintain steady levels (growth rates that hugged a zero-percent growth rate) from mid-2024 to late-2025. Recently, exports and imports have begun to weaken, with both flows showing contraction over 12 months. Goods imports are falling at a 5.5% pace as exports are falling at a 4% pace. 

As for intra-year trends, the sequential growth rates show exports have transitioned into a progressively more contractive mode, while imports have declined over 12 months, six months, and three months, but without a clear signal on whether the trend is getting better or worse.

Of course, the trade flow depends on price trends and economic trends; both are under strain and uncertainty.

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The S&P Global PMIs had been tracing improvement through February, but their March values showed a broad weakening globally. We have yet to see the March number for Dutch trade in that window, but it’s coming, and we should brace for things to get worse. Oil prices, of course, will be rising sharply, and there are concerns about the knock-on effects of higher oil prices on activity. Already there are supply chain disruptions for goods other than oil, with fertilizers and helium frequently cited. It is the planting season for farms, and fertilizer is in strong demand. Helium is an input into the chip-making process, and a shortage is not good for the tech sector. The largest hub producing helium is in Qatar, and it has been shuttered since the war in Iran began.

If the closure of the Strait of Hormuz drags on—and the newest development is that the U.S. has put an embargo on that passage—we will have to see what other shortages develop and how bad the oil shortage becomes. It is a difficult time; it comes during a period in which central banks have largely been missing their inflation targets, leaving them less flexibility to deal with shortages and fallout.  The Bank of England and the European Central Bank have put markets on notice that, if the Iran conflict drags on, at their next meeting rate hikes are quite possible. In the U.S., the Fed has given markets no guidance.

So far, the Baltic dry index has held up and does not show any clear evidence of global trade slowing. But that is something else to watch for. In economics, there is an expression about how things happen. And it says: first things take longer than you expect to occur, and then they progress at pace much faster than expected. There may not be a good warning period if these conditions worsen.

Netherlands

Dutch Trade Trends Improve Goods Balance—for Now

Tian Yong Woon

In this week’s Letter, we continue to track developments in the Middle East and their implications for Asia. While the recent US–Iran ceasefire initially provided some relief to markets, subsequent complications have kept uncertainty elevated, with no conclusive resumption of trade flows yet through the Strait of Hormuz (chart 1)—flows that are critical to restoring the global energy system to more normal conditions.

Overall, our Blue Chip Economic Indicators panellists have broadly downgraded growth expectations for Asia this year, with the exceptions of China and Taiwan, while inflation forecasts have been revised higher across the board (chart 2). That said, the growth and inflation impact from the conflict are largely viewed as transitory, with most panellists expecting them to last between six and twelve months (chart 3). Nonetheless, central banks in the region appear increasingly reluctant to ease policy further. This is evident in the latest round of decisions, where India, South Korea, and New Zealand all held policy rates steady (chart 4), citing heightened uncertainty stemming from the ongoing conflict.

While inflationary pressures are beginning to build more broadly across the region, China had already been experiencing a pickup in recent months (chart 5). This has been supported by easing producer price deflation and improving industrial profits, alongside policy efforts to curb excessive price competition among producers. Attention now turns to China’s upcoming Q1 GDP release and the full slate of monthly data due later this week (chart 6).

**Middle east conflict developments**
Crude oil prices fell sharply earlier last week following news of a temporary US–Iran ceasefire. That said, the geopolitical backdrop remains highly fragile, as reflected in continued rhetoric from both sides, alongside the US announcement of a naval blockade over the strait after talks failed to yield an agreement. Compounding this, Iran has indicated that it cannot fully reopen the strait, citing uncertainty over the location of sea mines it had previously laid—further complicating any swift normalization of oil flows. Even prior to these latest developments, IMF-tracked shipping volumes had only begun to show tentative signs of recovery and remain well below pre-escalation levels. As such, while the ceasefire provides a welcome reprieve, meaningful economic relief will hinge on a sustained restoration of oil flows—crucially without additional frictions or costs that could impair global trade. Until then, crude prices are likely to remain elevated, albeit possibly off recent highs, weighing on growth while sustaining inflationary pressures. In Asia, where many economies are heavily reliant on oil imports, the region is likely to bear a disproportionate share of these effects.

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**The latest Blue Chip Economic Indicators survey**
In light of recent developments, our latest Blue Chip Economic Indicators (BCEI) survey provides a timely update. It is a monthly poll of forecasters covering key economic indicators across a wide range of economies. As shown in chart 2, panellists have generally trimmed their 2026 growth forecasts across most Asian economies. Taiwan is a notable exception, with growth expectations revised higher, likely continuing to be supported by the ongoing AI-driven expansion. Meanwhile, forecasts for China’s 2026 growth were left unchanged. On the inflation front, expectations for 2026 have been revised higher across all Asian economies, consistent with the pass-through from the recent surge in oil prices. The largest upward revision was seen in Australia (+0.7 ppts), while increases were more modest in economies such as Japan and China (+0.3 ppts each).

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Digging deeper into this month’s BCEI survey, the special questions provide additional insight into panellists’ views. In particular, one question asked about the time horizon over which current energy supply chain disruptions are expected to materially affect global inflation and growth. Panellists largely view the impact as short term (chart 3), with most clustering around a six- to twelve-month window. Smaller shares see effects lasting either less than six months or extending between one and three years, while only a very small minority expect disruptions to persist beyond three years. Overall, while the recent oil price surge represents a clear shock to the global economy, it is widely seen as transitory—temporarily lifting inflation and weighing modestly on growth, but unlikely to drive a fundamental shift in the broader macroeconomic outlook.

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**The week’s central bank decisions**
Turning to last week’s key monetary policy decisions in the region, the central banks of India (RBI), South Korea (BoK), and New Zealand (RBNZ) all kept policy rates unchanged, with several common threads across their communications. Notably, each highlighted the considerable uncertainty stemming from the Middle East conflict, which has already begun to feed into global inflation via higher oil prices. This aligns with broader investor sentiment: the bar for further policy easing has risen given renewed inflationary pressures, while the threshold for a shift toward tightening remains high, as most economies are still far from overheating. On central bank–specific nuances, the RBI emphasized the delicate trade-off between anchoring inflation expectations and minimizing growth sacrifices. The BoK noted that its policy rate is around the neutral level, while flagging potential additional pressure on the won from elevated oil prices. Meanwhile, the RBNZ signalled that near-term inflation is likely to rise even as the economic recovery softens, citing significant supply chain disruptions linked to the Middle East conflict.

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**China and the week ahead**
Lastly, we turn to China and the week ahead. As shown in chart 5, even prior to the Middle East conflict, China had already begun to see a pickup in inflation—an early indication that it may be moving out of its prolonged period of chronically low, or even negative, price pressures. This recent firming in CPI inflation has been accompanied by more sustained growth in industrial profits and a steady improvement in producer price pressures, with PPI inflation recently turning positive after a multi-year stretch of deflation. Together, these trends point to gradually strengthening price dynamics. The shift in inflation also reflects underlying policy efforts to curb excessive price competition among producers, which had weighed on prices for an extended period. Looking ahead, the recent oil price shock could provide an additional boost to inflation, as higher energy costs begin to feed through into future readings.

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Looking ahead to the coming week, Asia faces a packed data calendar, with the spotlight firmly on China as its Q1 GDP release and the usual slate of monthly indicators are due (chart 6). A key focus will be how March data shapes overall Q1 growth, particularly given that activity in the first two months of the year largely surprised to the upside. Investors will also be watching for any early signs of spillovers from the Middle East conflict in the March prints. Retail sales will be closely monitored as a gauge of the effectiveness of policy support for consumption, while developments in house prices will remain in focus as the property downturn continues to unfold gradually.

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Asia

Economic Letter from Asia: A Shifting Consensus

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The Consumer Price Index rose 0.9% in March, easily the sharpest monthly rise since the inflation burst in 2022. Although pronounced in magnitude, the increase was not surprising, as essentially all analysts had built in pressure from the energy sector. Energy prices jumped 10.9%, led by a surge of 21.2% in gasoline prices. Other energy components wiggled: charges for electricity services rose 0.8%, offsetting declines in the prior two months; a drop 0.9% in the price of natural gas services followed sharp increases in the prior three months.

The press report from the Bureau of Labor Statistics showed food prices as unchanged, but calculating the shift to more than one decimal point showed a marginal decline (-0.005%) The dip was almost imperceptible, but it nevertheless was a welcome rarity. The decline occurred in the food-at-home component (i.e. grocery store prices, -0.2%); prices of food away from home (i.e. at restaurants and bars) rose 0.2%.

Core prices rose 0.2 percent, softer than the expected increase of 0.3%. Only two areas posted high-side readings. Apparel prices increased 1.0% after a jump of 1.3% in February, perhaps reflecting hope for an active spring selling season. Airfares jumped 2.7%, hardly surprising in light of recent energy developments. Sharper increases are likely in coming months because of higher fuel prices. Most other core items were contained, including declines of 1.0% in medical-care commodities and 0.4% in the prices of used motor vehicles. Prices of medical-care commodities have been quiet since the middle of 2024; the latest year-over-year change totaled only 0.3%. Prices of used cars and trucks have declined for four consecutive months, leaving a year-over-year decline of 3.2%.

Although core prices were well contained in March, the outlook is uncertain because of potential passthrough from higher energy prices. At the same time, recent trends in the inflation rates for core goods and core services offer a reason to be optimistic, as both are decelerating. As shown in the left chart below, core goods prices in the past six months have been subdued, which has pulled the year-over-year change from 1.5% last fall (August to October) to 1.2% in March. Core service prices, shown in the right chart below, have registered changes of 0.3% or 0.4% in the three months before the 0.2% reading in March. However, results for October and November were restrained, and changes in the past six months in total show deceleration. The year-over-year change of 3.0% in core service prices in March reflects an advance of 3.3% in the first six months of this span (annual rate) and 2.7% in the past six months. The pattern is choppy, but it traces a decelerating trend.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Gasoline prices drove the energy component higher; electricity prices also contributed.
- Food prices provided a surprise by posting a fractional decline.
- Core prices rose less than expected; both goods and services components were contained.

March CPI: Pressure in the Energy Sector (as Expected); Tame Elsewhere (Surprisingly)

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Total factory orders were virtually unchanged m/m in February following a flat reading in January and a 0.4% decline in December, data from the U.S. Census Bureau showed. The Action Economics Forecast Survey had expected a 0.2% m/m February increase. The year-on-year growth rate eased to 3.7% in February, the lowest since October, from 4.2% in January (+3.0% in February 2025), remaining far below the April 2021 peak of 39.6%. Notably, orders for nondefense aircraft & parts plunged 28.6% m/m in February following decreases of 1.7% in January and 22.7% in December, while orders for defense aircraft & parts fell 2.1% after a 26.9% January slump and an 11.8% December jump. Factory orders excluding defense edged up 0.1% (3.6% y/y), the third m/m increase in four months, following a 0.4% January rebound. Factory orders excluding the transportation sector rose 1.2% (2.5% y/y), the strongest of four consecutive m/m gains, after a 0.5% January increase.

Durable goods orders fell 1.3% (+7.4% y/y) in February after a 0.4% decline in January (in line with a 1.4% m/m decrease in the advance report on April 7), marking the fourth m/m decline in five months. The February m/m fall reflected a 5.3% orders drop (+10.2% y/y) in transportation equipment following a 1.9% January decrease, alongside m/m declines of 0.5% (+2.4% y/y) in furniture & related products and 0.3% (+4.9% y/y) in electrical equipment, appliances & components. Other major durable goods orders categories rose m/m in February, led by a 2.4% gain (10.5% y/y) in primary metals, followed by increases of 1.7% (9.5% y/y) in machinery, 0.5% (5.4% y/y) in fabricated metal products, and 0.2% (7.7% y/y) in computers & electronic products.

Nondurable goods orders, which equal nondurable goods shipments, advanced 1.5% (0.1% y/y) in February, the biggest of three successive m/m gains, after a 0.5% increase in January. The February m/m rise was led by a 6.2% jump (-6.4% y/y) in petroleum & coal products, followed by gains of 5.9% (-5.8% y/y) leather & allied products, 1.2% (-2.8% y/y) in textile mills, 1.0% (1.6% y/y) in paper products, 0.9% (1.2% y/y) in plastics & rubber products, 0.6% (3.7% y/y) in beverage & tobacco products, 0.5% (3.2% y/y) in chemical products, 0.4% (3.2% y/y) in apparel, and 0.2% (0.5% y/y) in food products. To the downside, nondurable goods shipments for textile products (-1.4%; -1.5% y/y) and printing (-0.4%; -0.9% y/y) fell m/m in February following their January increases.

Total shipments rose 1.4% (3.5% y/y) in February after gains of 0.7% in January and December, registering the fourth m/m rise in five months. Excluding transportation, shipments advanced 1.4% (2.3% y/y), the fifth m/m gain in six months, after a 0.5% January increase. Shipments of durable goods industries also rose 1.4% (6.9% y/y), up for the fifth time in six months, after a 0.9% January gain. This reflected m/m increases across nearly all durable goods shipments categories, led by a 2.5% rise (10.1% y/y) in primary metals, followed by gains of 1.7% (5.5% y/y) in electrical equipment, appliances & components, 1.7% (4.0% y/y) in furniture & related products, 1.6% (9.7% y/y) in transportation equipment, 1.4% (7.6% y/y) in machinery, 1.3% (3.8% y/y) in nonmetallic mineral products, 1.0% (6.1% y/y) in computers & electronic products, 1.0% (2.5% y/y) in miscellaneous durable goods, and 0.9% (5.4% y/y) in fabricated metal products. In contrast, durable goods shipments for wood products were the only category with a monthly decline in February, easing 0.1% (-2.9% y/y) following a flat January reading.

Unfilled orders edged up 0.1% (11.1% y/y) in February, the smallest of seven consecutive m/m increases, following a 0.6% rise in January. Excluding transportation, unfilled orders grew 0.2% (1.9% y/y), up for the seventh straight month, after a 0.3% January increase. Backlogs of durable goods ticked up 0.1% (11.1% y/y) in February, led by gains of 0.5% (2.0% y/y) in machinery and 0.2% (4.9% y/y) in electrical equipment, appliances & components, partially offset by declines of 0.7% (+1.5% y/y) in furniture & related products and 0.1% (+2.3% y/y) in primary metals.

Inventories inched up 0.1% (0.8% y/y) in February, the fourth successive m/m increase, following matching 0.1% gains in January and December. Excluding transportation, inventories edged up 0.1% (1.0% y/y) after no change in January. Durable goods inventories increased 0.1% (1.8% y/y) in February after rising 0.2% for four straight months, while nondurable goods inventories were virtually unchanged (-0.8% y/y) after declining 0.3% in January and December.

The factory sector data are available in Haver’s **USECON** database. The Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Factory orders virtually unchanged (+3.7% y/y) in Feb. for second straight month; still 7.6% above the Jan. ’24 low.
- Durable goods orders (-1.3%), fourth m/m fall in five mths.; nondurable goods orders (+1.5%), largest of three successive m/m gains; shipments (+1.4%), fourth m/m rise in five mths.
- Transportation orders -5.3% m/m, led by a 28.6% plunge in nondefense aircraft orders.
- Unfilled orders +0.1%, smallest of seven straight m/m increases.
- Inventories +0.1%, holding within a narrow 0.1%-0.2% range for four consecutive mths.

U.S. Factory Orders Flat in February on Weak Nondefense Aircraft Orders

Andrew Cates

**Positive Growth Surprises, Negative Inflation Surprises—For Now**
The global macro backdrop heading into the latest Middle East shock was, by recent standards, relatively constructive. As the chart shows, growth data had been consistently surprising to the upside, while inflation surprises have been in negative territory—an unusually benign combination suggesting resilient activity alongside easing price pressures. What is striking, however, is that—at least through March and into early April—this pattern has not yet been meaningfully dislodged. For now, the data flow still reflects a world that was stabilising rather than deteriorating. That said, this is almost certainly a lagging signal. Supply-side shocks of this nature—particularly those centred on energy—tend to work with a delay but can be highly disruptive once they feed through. The risk, therefore, is that the current “goldilocks” surprise dynamic proves short-lived as higher energy costs, supply chain frictions and rising uncertainty begin to reshape the incoming data in the weeks ahead.

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**Monetary Policy Expectations Shift as Easing Bets Are Repriced**
How policymakers respond to the evolving situation in the Middle East will be critical in shaping both market dynamics and the broader global outlook. This chart, based on the latest April Blue Chip Financial Forecasts survey, suggests that expectations are already beginning to shift. Forecasters are now less inclined to anticipate policy easing in the period ahead—particularly in the euro area, where expectations for rate cuts have been scaled back. Similarly, some of the easing previously priced for the Federal Reserve and the Bank of England has been pared back over the next 12 months. While this is not yet a full pivot toward tightening, it does point to a more cautious policy backdrop, reflecting the risk that renewed energy-driven inflation pressures could constrain central banks’ ability to support growth.

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**Delay, Don’t Tighten: Central Banks’ Likely Playbook**
If the previous chart highlights a shift in policy expectations, this one gives a clearer sense of the reaction function underpinning it. When asked how central banks would respond if energy-driven inflation proves more persistent, most panellists point not to renewed tightening, but to a more cautious delay in easing. In other words, the hurdle for rate cuts has risen, even if the bar for  hikes remains relatively high. This distinction matters. It suggests that policymakers are likely to treat the shock as a supply-driven inflation impulse—one that complicates the outlook but does not automatically warrant aggressive tightening. At the same time, the responses underscore a second important theme: divergence. A sizeable share of forecasters expect policy paths to vary significantly across regions, reflecting differences in energy exposure, inflation dynamics and domestic growth conditions. Taken together, the message is one of constrained flexibility. Central banks may want to support growth, but persistent energy pressures could keep them on hold for longer than previously anticipated—reinforcing the more cautious policy outlook already evident in market pricing.

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**Markets Signal Fiscal Concern, Not Inflation Panic**
If central banks are likely to proceed cautiously, financial markets are already beginning to draw their own conclusions. This chart shows that the recent adjustment in US Treasury markets has been driven primarily by a rise in real yields rather than a meaningful increase in inflation expectations. In other words, markets are not yet pricing a loss of monetary policy credibility or a sharp unanchoring of inflation expectations. Instead, the move points more toward concerns around the broader policy mix—particularly the fiscal backdrop and the potential for increased borrowing needs in an environment of heightened geopolitical risk. This distinction is important. A rise in inflation expectations would suggest fears of central banks falling behind the curve. What we are seeing instead is a repricing of real rates, consistent with tighter financial conditions and a higher risk premium. For now, at least, markets appear to view the shock less as a classic inflation spiral and more as a development that complicates the growth outlook and places greater strain on policy frameworks—especially on the fiscal side.

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**Electricity Prices Reflect Energy Dependence**
The initial response in electricity markets since the Middle East disruption has followed a familiar pattern. Economies with greater domestic energy capacity—such as Scandinavia and, to a lesser extent, the US—have seen relatively contained electricity prices. By contrast, those more reliant on imported energy—most notably the UK and parts of Europe—continue to face significantly higher costs

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**Generation Capacity Determines Energy Resilience**
These price dynamics are closely linked to underlying differences in electricity generation capacity. As the sixth chart shows, countries with higher per capita electricity production—again including Scandinavia and the US—are structurally better positioned to absorb external shocks. In contrast, economies with more limited domestic generation capacity, such as the UK and Germany, are inherently more exposed to fluctuations in global energy markets. This structural divide is likely to prove increasingly important in the period ahead, influencing not just near-term inflation outcomes but also the relative resilience of growth across economies as energy costs remain volatile.

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Amid further tentative signs of de-escalation—most notably President Trump’s decision on April 7th to step back from further escalation—financial markets have stabilised somewhat, but the macroeconomic implications of the Middle East crisis remain highly uncertain. As our charts show, the global economy entered this shock from a position of relative strength, with positive growth surprises and easing inflation pressures still evident in the data (chart 1). However, that benign backdrop now looks vulnerable. Central banks are already reassessing the outlook, with expectations for policy easing being pared back (chart 2) and a growing consensus that any response to persistent energy-driven inflation will likely involve delaying cuts rather than tightening aggressively—albeit with significant regional divergence (chart 3). Financial markets, for their part, are not yet signalling a loss of inflation control, but the rise in real yields suggests increasing concern around the broader policy mix, particularly fiscal pressures (chart 4). Finally, the adjustment to the shock is unlikely to be uniform. Structural differences in domestic energy capacity are already driving wide divergences in electricity prices, leaving more import-dependent economies exposed to higher costs and sharper trade-offs between growth and inflation (charts 5 and 6). Taken together, the message is clear: even if geopolitical tensions ease, the economic aftershocks are likely to be uneven, persistent and increasingly shaped by structural constraints.

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Charts of the Week: From Oil Shock to Policy Dilemma

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The industrial production index fell 0.5% in March, noticeably weaker than the expected increase of 0.1%. In addition, the March results were joined by slight net downward revisions in prior months (sharp upward revision in February offset by a larger downward adjustment in January and tweaks in earlier months). A good portion of the March softness was the result of a drop of 2.3% in utility output, which is not deeply concerning because changes in this sector typically are driven by weather conditions. However, mining activity also was soft (-1.2%), and manufacturing production dipped 0.1%.

Within manufacturing, auto production played a large role in the dip, registering a decline of 3.7%. However, the auto sector had plenty of company on the soft side, as furniture, textiles, apparel, and printing all posted declines of more than 1.0%. Given these drags, manufacturing output excluding autos rose only 0.1%. There was a nearly even split between expanding and contracting industries within manufacturing: 11 boosting production and 9 reducing activity.

The dip in manufacturing activity in March might seem inconsequential in light of solid advances in January and February (up 0.6% and 0.4%, respectively). However, the gains early in the year followed a weak fourth quarter, leaving an unimpressive trend.

Trends in industrial activity are often more apparent by focusing on the level of production indexes rather than month-to-month (or quarter-to-quarter) changes. As shown the chart below, the level of the manufacturing index stirred for a time in 2025, but it lost momentum in the closing months of the year. Changes so far in 2026 have not pushed the index above the September 2025 peak. The 6-month moving average of the manufacturing index is now running sideways.

The capacity utilization rate in manufacturing has naturally reflected movement in production. Utilization rose in 2025 as production strengthened, but it retraced most of the upward movement once momentum in production faded. The utilization rate in manufacturing stood at 75.2% in March, down slightly from the average of 75.4% in 2025.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- Downward noise in utility output; slow activity in manufacturing and mining.
- Flat underlying trend in recent months.

Industrial Production: Soft in March

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