Relief rallies meet lingering risks

Welcome to another day of conflicting signals. Oil is trading back near US$100 a barrel, down from around US$115 on Monday. Earlier this week, US President Donald Trump said he had postponed plans to bomb key Iranian energy sites. Overnight, the New York Times reported that the US had delivered a fifteen-point plan to end the war, while Israeli TV suggested Washington was seeking a month-long ceasefire. 

All this is fuelling a degree of optimism; Asian stock markets climbed this morning, and US and European markets are likely to follow.

Still, the US is sending thousands more troops to the region and the Strait of Hormuz remains closed to almost everybody. Optimists will see an uneven but unmistakable drift towards an off-ramp. Others may point out that little has changed since Iran effectively closed the Strait three weeks ago.

Black Wednesday

In the absence of certainty about the future, investors can at least now gauge the scale of the damage so far, as many key data points now cover the period since the war began. This morning's UK inflation figures, which showed prices holding steady at 3% in February, can largely be disregarded as out-of-date. However, metrics spanning inflation expectations, consumer sentiment, manufacturing and mortgage pricing suggest the scale of disruption – even if the war were to end quickly – will take many months to unwind.

Among the most telling indicators is yesterday's flash Purchasing Managers' Index (PMI) from S&P Global. Private sector business activity slowed markedly, though it remained marginally in growth territory. Optimism is at its lowest level since June 2025. Worryingly, manufacturers signalled the steepest rise in input costs since October 2022. The seasonally adjusted Input Prices Index registered the biggest month-on-month acceleration of input price inflation across the manufacturing sector since October 1992, following Black Wednesday in the prior month.

“Output growth across manufacturing and services has slowed to a crawl as companies blamed lost business directly on the events in the Middle East, whether through heightened risk aversion among customers, surging price pressures, higher interest rates, or via travel and supply chain disruptions," says S&P Global Market Intelligence chief business economist Chris Williamson.

A potent mix

Wall-to-wall coverage of the war is already feeding through into expectations of higher inflation – a key metric watched by Bank of England (BoE) policymakers. A monthly YouGov survey conducted for Citi shows short-term inflation expectations rose sharply to 5.4% in March, up from 3.3% in February. That marks the highest level since 2023, when the UK’s headline inflation rate was still running above 10%.

Rapidly rising input costs and surging inflation expectations are a potent mix. Short-term UK government bonds are on track for their worst month since the mini-budget as traders now see as many as four hikes from the BoE this year. The UK is seen as uniquely exposed to an energy crisis – the public finances are weak and the government's already-thin headroom means any fiscal spending to offset higher energy bills could spook investors.

Even so, a defining feature of this moment is the divergence between markets and economists, with the latter generally taking a more measured view of the UK rate outlook. For a deep dive on this tailored to the housing market, I recommend Tom Bill's latest conversation with Pepperstone analyst Michael Brown, which you can listen to the Housing Unpacked podcast here. 

The FT canvassed fifteen economists earlier this week, with more than half expecting the BoE to hold interest rates at 3.75 per cent for the remainder of the year, provided energy prices do not rise further. Another four economists believe the central bank could return to rate cuts before the end of 2026, as the shock feeds through into weaker growth and rising unemployment. 

Although some prices will jump in the short term, more persistent inflationary effects “are only plausible when firms have pricing power and workers have bargaining power . . . neither is the case now," Berenberg economist Andrew Wishart tells the paper.

Lender withdrawals

Lenders have withdrawn more than a fifth of all mortgage products since the war began, according to Moneyfacts. While that ⁠has not yet reached the 45% of products withdrawn seen during the COVID and mini-budget crises, it remains an ongoing process.

Bellway reported interim results yesterday and noted "volatility in the mortgage market," adding that the "ongoing conflict in the Middle East heightens the risk of both inflationary cost pressures and an impact to customer demand." Still, the conflict "at this stage... has not had a material impact on trading", chief executive Jason Honeyman said.

In the six weeks since 1 February, the company's private reservation rate per outlet per week, including bulk sales, was 0.70, down from 0.76 a year earlier. The company expects its full year underlying operating margin to be similar to the first half at around 10.5%.

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