James Brodie
Head of Learning & Development, Flux
Energy Prices to Grind Higher, Japanese 10-yr Yield At Its Highest in 27 Years
Markets underprice stagflation shock; energy squeeze looms, supply chains strain, physical tightness rises, risks escalating
Markets are sleepwalking into a supply shock that will rewrite the macro landscape
The data is unambiguous. US GDP came in at just +0.5% in Q4. March CPI jumped to 3.3% - core at 2.6%, the highest since May 2024 (Chart 1, Bloomberg). Consumer confidence collapsed to 47.6 against an estimate of 51.5 - a record low in 74 years of history (Chart 2, Uni of Michigan / Bianco Research). The OBBBA tax refund tailwind that's been propping up the consumer? That fades the moment we get past April 15th.
This is stagflation. Not a warning. An arrival.
Meanwhile, hedge fund positioning tells the full story - long/short ratios sit at 1.61, near 5-year lows, signalling heavy short exposure. CTAs are holding one of their shortest positions on record yet were mechanically forced to buy ~$10bn of S&P 500 last week, with an estimated ~$30bn of additional buying set to follow this week on a flat tape (Chart 3, Goldman). This is not a bull market. It's a short squeeze in slow motion.
Japan's 10-year yield is now at its highest level in 27 years.
Then there's the Middle East.
President Trump has instructed the US military to begin its Strait of Hormuz blockade at 10am ET today. Iran's response? If the blockade proceeds, Tehran says it will deploy the Houthis to seize control of the Bab el-Mandeb Strait - cutting off access to the Red Sea and removing an additional 12% of global energy supply from the market. Combined with Hormuz, that's a potential 32% shortfall in global energy supply. Brent futures opened +8.10 higher this morning on the news.
ACI Europe has already warned that European airports face "systemic" shortages of jet fuel if the Strait of Hormuz is not fully reopened within three weeks (FT).
And the supply chain stress doesn't stop at oil. China has banned sulphuric acid exports from May 1st - a substance that powers fertilizers, copper refining, EVs, semiconductors, and pharmaceuticals. With Middle East sulfur supply already disrupted, prices are up 200–500%. China's own PPI has finally broken 41 consecutive months of deflation (+0.5% YoY, CPI +1.0% YoY) - but this is cost-push inflation, not demand-led recovery. The wrong kind of reflation, at the worst possible time.
The spread between Dated Brent and the front futures contract continues to widen - the dislocation between physical and paper markets is accelerating. Physical markets are screaming. Paper markets are still snoozing.
The trade is not complicated.
▲ BUY: Energy stocks, pipelines, oil services, fertilizer producers, defence.
▼ SELL: Airlines - they get hit hardest. Office REITs. Consumer discretionary.
Markets are pricing calm. The system is pricing shortage.
Complacency is a gift. Energy prices are not done. The window to position ahead of this is closing faster than the Strait itself.
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