Cross Asset Pricing Gap Vs Oil Markets
Sources: 1 • Confidence: Medium • Updated: 2026-04-11 17:11
Key takeaways
- Regional equity differentials may be mostly priced, but aggregate global equity pricing does not reflect an oil shock comparable to 2022.
- For exchange rates during oil shocks, relative macroeconomic damage from higher energy prices matters more than relative monetary policy differences.
- If households stop dissaving and nominal spending falls toward income growth near 3.5% while inflation runs near 4%, real spending growth becomes negative.
- Central banks historically do not ease into an oil shock.
- Before the shock, the economy was savings-driven, with households and firms drawing down savings to sustain spending and investment as labor markets weakened.
Sections
Cross Asset Pricing Gap Vs Oil Markets
- Regional equity differentials may be mostly priced, but aggregate global equity pricing does not reflect an oil shock comparable to 2022.
- Equity and bond markets are underweighting the oil shock by relying on mean-reversion narratives rather than 'counting the barrels,' creating a cross-asset pricing gap.
- Aggregate global equities have not fallen as much as in 2022 despite an oil shock he views as comparable or larger, creating a potential mispricing.
- The oil forward curve implies oil prices about 40% higher at year-end than at the start of the year, indicating a more extended shock than 2022.
- The oil forward curve implies prices about 40% higher than today even after assuming a high near-term probability of an off-ramp to the conflict.
- Since the shock began, risk premia have not expanded much and stocks and bonds are roughly flat, which he argues is inconsistent with typical oil-shock episodes.
Cross Country Terms Of Trade And Fx Implications
- For exchange rates during oil shocks, relative macroeconomic damage from higher energy prices matters more than relative monetary policy differences.
- A broader unwind of U.S. investors' allocation to cheaper foreign assets could trigger a dollar squeeze that would be harmful to aggregate asset prices.
- Large oil price increases are disproportionately negative for Japan and Europe as major energy importers, while the U.S. and Canada are better positioned to absorb them.
- On a relative basis, Japanese and European equities have largely repriced the oil-shock differential by giving back most of their year-to-date gains.
- Energy-driven macro divergence is expected to be a dominant driver of U.S. dollar strength versus Europe and Japan going forward.
Oil Shock Transmission And Lags
- If households stop dissaving and nominal spending falls toward income growth near 3.5% while inflation runs near 4%, real spending growth becomes negative.
- The disinflationary effects of an oil shock occur only after the initial price spike reduces real spending, weakens labor markets, and then slows nominal income and demand.
- Oil shocks are stagflationary because they raise inflation while lowering real growth.
- If nominal spending holds near 5% and oil lifts inflation by about 1–1.5 percentage points, real household spending growth falls toward zero.
Policy Reaction Function And Rates Pricing
- Central banks historically do not ease into an oil shock.
- Long-end bond risk premia have not meaningfully expanded after the shock, implying markets have not fully priced renewed inflation persistence.
- Given an oil-driven inflation impulse of roughly 1–2%, policy markets may reprice by the equivalent of a couple of hikes over the next year (for example by pricing out cuts).
- A move of 10-year yields toward roughly 5% would create meaningful drag on activity and asset prices, after which bonds could rally as growth weakens.
Starting Condition Consumer Dissaving And Fragility
- Before the shock, the economy was savings-driven, with households and firms drawing down savings to sustain spending and investment as labor markets weakened.
- Because substantial dissaving was already underway, households have less remaining capacity to absorb an additional oil-driven rise in the cost basket than they did a few years ago.
- Pre-shock, household income growth was about 3.5% while nominal spending growth was about 5.5%, implying the savings rate was falling to close the gap.
Watchlist
- If households stop dissaving and nominal spending falls toward income growth near 3.5% while inflation runs near 4%, real spending growth becomes negative.
- Regional equity differentials may be mostly priced, but aggregate global equity pricing does not reflect an oil shock comparable to 2022.
- A broader unwind of U.S. investors' allocation to cheaper foreign assets could trigger a dollar squeeze that would be harmful to aggregate asset prices.
Unknowns
- What are the actual current oil forward-curve levels and how stable is the implied ~40% higher pricing over time?
- How much of the oil price move is passing through into headline and core inflation, and over what lag?
- Do households continue dissaving, or does the saving rate inflect upward (and if so, when)?
- How do labor-market indicators evolve over the next 2–4 quarters in response to any real-spending weakness?
- Do central banks actually reprice toward the 'couple of hikes equivalent' described, and do they communicate a non-easing stance consistent with the historical claim?