Economic growth in the Czech Republic is becoming more robust after a stronger-than-expected expansion last year, according to the central bank.
Gross domestic product increased 2.6% in the fourth quarter from a year earlier, compared with the central bank's 2.5% forecast, data published on Tuesday showed. Household spending, government consumption and investments all beat the bank's projections.
"Household consumption reached a milestone by exceeding its peak observed in late 2019 for the first time, thus rising above the pre-Covid level," Petr Sklenar, the central bank's chief economist, said in a statement.
The Czech economy took longer than its neighbors to shake off the impact of the coronavirus pandemic after a period of high inflation and tight monetary policy weighed on household spending. The central bank sees full-year GDP growth accelerating to close to 3% this year after 2.6% in 2025.
Key components of demand contributed to the "favorable" growth result in the fourth quarter, with a decline in inventories representing the only exception, according to the central bank.
Still, a prolonged conflict in the Middle East and the resulting impact of higher energy costs and potential global supply chain disruptions pose a downside risk to the outlook, according to Radomir Jac, chief economist at Generali Investments CEE.
The US-Israeli war on Iran is rekindling inflation concerns across financial markets, sapping the outlook for global bonds that had just posted their best start to a year since the pandemic.
Traders from Sydney to London to New York have offloaded government debt since Monday as they game-plan how a prolonged conflict in the Middle East may ramp up oil and supercharge inflation. Those concerns are eroding the haven appeal of fixed-income assets, with sovereign debt around the world posting losses this week.
There are few signs of a near-term respite. US President Donald Trump -- set on regime change in Tehran -- has vowed to do "whatever it takes," forcing traders to confront the possibility that the conflict will last longer than they originally expected.
"If inflation starts drifting higher and the war is still raging, would it be prudent for central banks to cut rates? Most investors think not, hence the price action," said Brian Mangwiro, fund manager at Barings in London. Facing such uncertainty, fund managers "see it fair to move to cash until we have some clarity," he added.
The recalibration in rates pricing has been rapid. Traders cut the chances of a second Federal Reserve interest-rate cut this year to around 50%, whereas they saw two cuts as recently as Friday. That drove a Treasuries selloff led by shorter-dated bonds, with the two-year yield jumping as much as 12 basis points.
In the case of the European Central Bank, traders have flipped to bet on a 50% chance of a hike this year; last week the market saw a 40% chance of a cut. In the UK, the market has gone from pricing at least two cuts to losing conviction in just one.
Central bankers are already warning of the potential ramifications for monetary policy. European Central Bank Chief Economist Philip Lane said a prolonged war in the Mideast and a persistent fall in oil and gas supplies could cause a "substantial spike" in inflation and a sharp drop in outputBloomberg Terminal, according to the Financial Times.
On the other side of the world, Australia's central bank chief, Michele Bullock, warned inflation fears may result in an interest-rate increase this month. Australia's yields jumped as much as 14 basis points on Tuesday.
Japanese government bonds also fell Tuesday, even after firm demand at a sale of 10-year notes, underscoring broader concern that yields don't fully price in inflation risks. A Bloomberg gauge of global bonds slid 0.8% yesterday, the biggest loss since May.
The slump in US Treasuries pushed the 10-year yield to 4.10%, 16 basis points higher than Friday's close.
A new "stagflationary wind" is blowing through the global economy amid the higher geopolitical risks, Mohamed El-Erian, former chief executive officer at Pacific Investment Management Co., wrote in a post. "With its ultimate impact dictated by the duration and spread of the conflict - the US government bond market has opted for inflation concerns."
More than geopolitical shocks, higher oil prices can "significantly" lift yields, a Deutsche Bank AG report last week showed. The strategists analyzed the largest geopolitical events of the last several decades, including Iraq's invasion of Kuwait in 1990, the Sept. 11 attacks in the US and Russia's invasion of Ukraine.
A Monday report from Societe Generale SA's Manish Kabra, meanwhile, found that five oil supply shocks over the past 50 years had on average pushed down the 10-year Treasury note over the following one-week, three-month and six-month timeframes.
In Europe, a near doubling of gas prices after the closure of the world's biggest LNG export plant in Qatar on Monday has added to the inflation concerns for short-dated bonds, in a region heavily reliant on imports.
"We were all saying how orderly it was yesterday morning, until the Qatar gas news broke," Gareth Hill, senior fund manager at Royal London Asset Management. "That seemed to be the catalyst for the selloff."
Still, there are a few pockets where bond prices are holding up. One is China, where yields were little changed Monday and bond futures rose.
Abundant cash conditions following the central bank's liquidity injection helped anchor yields. Traders' expectationsBloomberg Terminal of potential monetary easing around the National People's Congress also boosted confidence in the world's second-largest bond market.
Whether or not this lasts is up for debate. Oil and the outlook for energy prices are the main variables to watch for macro investors, and sentiment remains fragile as investors parse through fast-moving headlines on the Middle East conflict.
"The Iran crisis reinforces a structural shift that we have been highlighting: geopolitics is becoming a recurring macro driver again," Monica Defend, head of Amundi Investment Institute, wrote in a note. "Energy volatility, inflation uncertainty, and regional dispersion are returning as defining market features."