Shenwan Hongyuan: Oil Prices Continue to Rise, Fed Rate Cut Expectations Decline Significantly

Summary

Since the Middle East geopolitical conflict at the end of February, crude oil prices have continued to rise, raising concerns about stagflation. The March FOMC meeting adopted a hawkish stance, triggering tightening trades, and the market is now betting on whether the Federal Reserve will raise interest rates this year. The Fed’s hawkish policy stance is in line with expectations, but “no rate cuts” remains the baseline, with ongoing attention on the negative feedback from tightening financial conditions.

I. Major Asset Classes & Overseas Events & Data: Oil Prices Continue to Rise, Market Expectations for Rate Cuts Drop Significantly

Oil prices continue to climb, gold and silver prices drop sharply. During the week, the S&P 500 fell by 1.9%; the 10-year U.S. Treasury yield rose by 11 basis points; the dollar index dropped to 99.51; offshore RMB appreciated to 6.9062; Brent crude oil rose 8.8% to $112.2/barrel; COMEX gold fell 8.9% to $4,576.3/oz; COMEX silver fell 12.7% to $69.5/oz.

U.S. Treasury issuance volume increased, U.S. deficit lower than the same period last year. As of March 18, the U.S. TGA balance decreased to $875.8 billion, down from mid-February 2026; net rolling issuance of Treasuries on the 15th rose to $14.572 billion. As of March 17, the cumulative fiscal deficit for 2026 was $462.9 billion, compared to $512 billion last year.

The March FOMC meeting was hawkish, and February US PPI exceeded market expectations. The Fed held rates steady, but dot plots and economic forecasts signaled a hawkish tilt, leading to downward revisions in market expectations for rate cuts this year; US February PPI was stronger than expected, driven mainly by food and energy; ECB and BOJ March meetings kept rates unchanged, with the ECB significantly raising inflation forecasts.

Risk warnings: escalation of geopolitical conflicts; US economic slowdown exceeding expectations; Fed turning hawkish more than expected.

Main Body of the Report

I. Major Asset Classes & Overseas Events & Data: Oil Prices Continue to Rise, Market Expectations for Rate Cuts Drop Significantly

(1) Major Asset Classes: Oil Prices Continue to Rise, Gold and Silver Prices Drop Rapidly

During the week, developed market stock indices all declined, with most emerging markets also down. Developed markets: Germany DAX, UK FTSE 100, France CAC40 fell 4.6%, 3.3%, 3.1%; emerging markets: South Africa FTSE JSE All Share, Vietnam Ho Chi Minh Index, Brazil BOVESPA declined 4.2%, 2.9%, 0.8%.

During the week, most sectors in the S&P 500 declined. Utilities, Materials, Consumer Discretionary fell 5.0%, 4.5%, 4.5%; Energy and Financials rose 2.8%, 0.4%. Eurozone sectors mostly declined, with Consumer Discretionary, Consumer Staples, Technology down 6.1%, 5.7%, 5.3%; only Energy rose 6.9%.

The Hang Seng Index declined across the board, with most sectors down. Hang Seng Tech, Hang Seng China Enterprises, and Hang Seng Index fell 2.1%, 1.1%, 0.7%. Materials, Information Technology, Consumer Discretionary declined 11.3%, 5.0%, 2.9%; Conglomerates, Financials, Energy rose 2.2%, 1.8%, 0.9%.

Major developed countries’ 10-year government bond yields mostly declined. U.S. 10-year yield up 11.0bp to 4.39%; Germany up 5.0bp to 3.06%; UK down 5.99bp to 4.70%; France down 2.1bp to 3.64%; Italy down 1.1bp to 3.79%; Japan down 2.4bp to 2.23%.

Emerging markets’ 10-year yields mostly rose. Turkey up 46.0bp to 30.99%; Brazil down 11.5bp to 14.20%; Vietnam up 0.6bp to 4.34%; South Africa up 12.0bp to 9.05%; Thailand up 5.5bp to 2.09%; India up 5.0bp to 6.73%.

The dollar index declined, while most other currencies appreciated against the dollar. Dollar index down 1.6% to 99.51; EUR/USD up 1.3%; GBP/USD up 0.9%; USD/CAD flat; JPY/USD up 0.3%. Most emerging market currencies depreciated against the dollar, with BRL up 0.1%, PHP down 0.1%, KRW down 0.2%, IDR down 0.3%, EGP up 0.2%, MXN up 0.2%, TRY down 0.2%.

RMB appreciated against the dollar this week. Onshore and offshore RMB exchange rates against USD moved to 6.8817 and 6.9062; JPY/RMB appreciated 0.4%; GBP/RMB appreciated 1.0%; EUR/RMB appreciated 0.7%.

Commodity prices mostly declined. Brent crude oil rose 8.8% to $112.2/barrel; WTI fell 0.5% to $98.2/barrel; LME nickel down 3.4% to $16,925/ton; glass down 7.1% to 1,054 yuan/ton; live pig prices down 8.3% to 10,220 yuan/ton.

Metals and precious metals prices declined across the board. LME aluminum down 5.7% to $3,287/ton; LME copper down 5.6% to $12,128/ton; inflation expectations rose 2bp to 2.38%; COMEX silver down 12.7% to $69.5/oz; COMEX gold down 8.9% to $4,576.3/oz; 10-year real US Treasury yield up 9bp to 2.01%.

(2) U.S. Treasury: TGA Decreases, Net Treasury Issuance Rises

As of March 18, 2026, the U.S. TGA balance decreased to $875.8 billion, significantly lower than mid-February 2026; during March 16-18, net Treasury issuance was lower than last week, with several days of high redemptions of short-term debt; the latest rolling 15-day net issuance reached $14.572 billion.

(3) U.S. Fiscal: Cumulative Deficit at $462.9 Billion

As of March 17, 2026, the U.S. cumulative fiscal deficit for 2026 was $462.9 billion, compared to $512 billion last year; total expenditures reached $1.8423 trillion, up from $1.7661 trillion; total tax revenue was $1.0164 trillion, up from $931 billion; tariff revenue was $63 billion, up from $19.6 billion.

(4) Midterm Elections: State-Level Competition Deepens, Trump’s Net Support Rate -15.2%

As of March 19, 2026, Trump’s support rate was 40.4%, opposition 55.6%, net support -15.2%; at Congress level, Democratic support was 47.8%, Republican 42.7%, with a 5.1 percentage point lead for Democrats. Key state elections and political trends continue to influence the race. Recent state and local election results are seen as “preliminary battles” for the midterms. Over the past 14 months, Democrats have gained about 28 state legislative seats in traditionally Republican-leaning states like Texas, Arkansas, Mississippi, and even flipped some “deep red” states, indicating some voter support for Republicans is softening.

(5) Federal Reserve: Market Significantly Downgrades Expectations for Rate Cuts

The March FOMC meeting held rates steady but adopted a hawkish tone. Coupled with uncertain oil price outlook, market expectations for rate cuts in 2026 have rapidly declined. According to CME data, markets no longer expect the Fed to cut rates in 2026. In the short term, the Fed’s focus remains on inflation, but some officials (e.g., Waller) have signaled room for rate cuts within the year.

(6) ECB: Rates Hold Steady, Inflation Forecast Significantly Raised

The ECB announced rates unchanged, in line with market expectations. Deposit facility rate, main refinancing rate, and marginal lending rate remain at 2%, 2.15%, and 2.40%, respectively.

The statement noted that the Middle East conflict has increased inflation risks in the Eurozone and posed downside risks to the economy. According to the ECB, the conflict has significantly increased economic uncertainty, mainly by pushing energy prices higher, which impacts short-term inflation. The ECB’s baseline forecast for 2026 real GDP growth was revised down to 0.9%, with HICP and core HICP inflation raised sharply to 2.6% and 2.2%. The medium-term impact depends on conflict intensity, duration, and energy prices (indirect/second-round effects).

The ECB will continue to adopt a “gradual decision-making” approach, but some officials suggest a possible rate hike in April. The ECB stated it will base policy decisions on data and assess at each meeting, aiming to keep medium-term inflation at 2%. Rate decisions will depend on inflation outlook and risks, without pre-committing to a specific rate path. However, ECB Governing Council member and Irish Central Bank Governor Gabriel Makhlouf said on Friday that if data warrants, a rate hike in April is not impossible, emphasizing “the next meeting will definitely be an active one.” German Bundesbank President Joachim Nagel also indicated that if inflation pressures persist, the ECB may need to act as early as April.

(7) Bank of Japan: Rates Unchanged, in Line with Market Expectations

The Bank of Japan announced in March to keep policy rates at 0.75%, in line with expectations. The decision was approved by 8 votes to 1, with Hajime Takata voting against, supporting a rate hike to 1.0%.

Japan’s economy is gradually recovering but shows signs of weakness. Corporate and employment markets remain relatively stable, consumer resilience persists, but housing investment shows weakness. Current geopolitical tensions and rising oil prices may worsen Japan’s trade conditions and exert upward pressure on inflation, potentially hampering economic growth.

The BOJ will continue to adjust monetary easing gradually based on economic and price developments. Policy will be data-dependent, aiming to achieve 2% inflation, and will respond flexibly without pre-setting a specific path.

(8) Inflation: US February PPI Exceeds Expectations

US February PPI rose 3.4% YoY and 0.7% MoM, versus market expectations of 0.3% MoM and previous 0.5%. The MoM increase was mainly driven by energy and food components, while service sectors saw narrower gains. Industries such as retail, information, securities, theme parks, and accommodation showed MoM increases, indicating ongoing labor and operational cost pressures.

(9) High Frequency Data: Initial Jobless Claims Below Expectations

As of the week ending March 14, initial jobless claims were 205,000, below the market expectation of 215,000. For the week ending March 7, continued claims were 1.857 million, slightly above the expected 1.852 million (seasonally adjusted). Non-seasonally adjusted data show claims are consistent with historical patterns.

II. Global Macro Calendar: Focus on US Markit PMI

Risk Warnings

1. Escalation of geopolitical conflicts. The Russia-Ukraine conflict is ongoing; further escalation could increase oil price volatility and disrupt global “de-inflation” efforts and “soft landing” expectations.

2. US economic slowdown exceeding expectations. Watch for risks of weakening employment and consumption.

3. Fed turning hawkish more than expected. If US inflation proves more resilient, it could impact the pace of future rate cuts.

(Source: Shenwan Hongyuan)