If you were just following equity markets, then you wouldn’t suspect we were in the middle of the biggest oil supply disruption in history. To be fair, even if you were just watching oil prices, you wouldn’t think so either. The price of a barrel of Brent crude is still only slightly above $107 – well below its $139 peak in March 2022 after Russia’s invasion of Ukraine.

Outside of specific segments, like jet fuel, there are many reasons for this apparent lack of concern in oil markets. They were oversupplied coming into the crisis and stocks were high. Huge releases from government stores combined with some demand rationing in Asia also mean the loss of output from the Middle East hasn’t been especially painful yet. Throw in plenty of jawboning the price down from President Trump, and traders’ fears about being caught out by a ceasefire, and oil prices are much lower than the absolute loss of supply would suggest.

For financial markets, this relatively low oil price means it doesn’t look like there’s a lot to be worried about. At current levels, the hit to the global economy − especially the US − will be manageable and most central banks can avoid hiking interest rates. Add in a continued surge in AI spending, with the Philadelphia Semiconductor Index (the Sox) up 50% in the last month, and the US S&P 500 hit a record high, as did Japan’s Nikkei 250. Even our own FTSE 100 is down only 5% from its peak; a good showing, considering the IMF and OECD both think the UK will be the hardest hit of the developed economies.

What does the latest UK economic data tell us?

Last week’s batch of economic data backed up the markets’ optimism. UK retail sales continued growing in March, suggesting that higher fuel prices hadn’t crimped consumer spending yet. April’s PMI business surveys also rose unexpectedly, suggesting businesses aren’t panicking.

Nothing to worry about, then?

Maybe. The resilience of markets and the UK economy so far is a pleasant surprise, but clearly the risks are building. The Bank of England’s (BoE) Deputy Governor of Financial Stability, Sarah Breeden, made headlines last week by saying financial markets are not reflecting the risks in the global economy at the moment and that they “expect there will be an adjustment at some point”. For a Bank of England official, that’s as close to waving a big red flag as we’ll get.

As well as showing resilience, the latest economic data also hides some darker secrets. The drop in the unemployment rate from 5.2% in January to 4.9% in February was driven mainly by people giving up looking for work and dropping out of the labour force. This is hardly a sign of a booming economy. Retail sales were also boosted by the largest rise in fuel sales in five years as drivers raced to fill up before prices rose. Even the rosy PMIs look suspect. Much of the jump in activity was fuelled by firms bringing forward activity to get ahead of price rises and supply shortages. This potentially sets us up for some nasty surprises over the coming months as the full impact of the energy price shock sets in and the boost from front-loading fades.

The big risk the BoE highlighted is that all these factors become self-reinforcing. A further rise in oil prices looks inevitable if the Strait of Hormuz remains closed much longer. This could cause a sharp sell-off in financial markets, which, in turn, would add to the drag on the economy from higher oil prices.

Hopefully, markets are right to be relatively relaxed, but there is a whiff of complacency in the air.

UK interest rate rises more likely, but not yet

In any case, the data’s resilience so far makes future BoE rate hikes more likely. It was abundantly clear from last week’s slew of data that cost pressures are surging and firms are planning to pass on as much of this as they can.

If the economic data stays relatively strong (a big if), then it would allow the BoE to focus less on the hit to the economy and more on containing the energy shock’s inflationary impact. This means the likelihood of rate rises this year has risen over the last week.

The latest figures won’t make much of a difference to this week’s Monetary Policy Committee (MPC) decision. Uncertainty over the direction of future energy prices and the impact on the economy is so high at the minute that it makes sense to wait and see how things pan out. We expect a ‘hawkish hold’, which means no change in interest rates, but that the MPC’s guidance will emphasise tackling inflation more than supporting the economy.

Financial markets are pricing in two rates hikes this year with the risk of a third. This is totally dependent on where the Iran crisis goes from here and if the economic data continues to hold up. We still feel that either a hold or one rate rise is more likely, but the odds have clearly shifted over the last week towards more rate hikes.

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