Goldman Sachs Macro Trader Warning: Central Banks Missed Opportunity to Stabilize Markets, "Energy is Driving Everything"

Goldman Sachs traders warn that energy prices have become the core variable driving all macro asset trends amid the impact of Iran’s attack on the world’s largest LNG facility. This week, the Federal Reserve, European Central Bank, and Bank of England not only failed to stabilize the markets but also reinforced hawkish stances, intensifying the sensitivity of front-end rates to energy prices.

In a report, Goldman Sachs macro traders Cosimo Codacci-Pisanelli and Rikin Shah stated that Iran’s attack on Qatar’s Ras Laffan LNG facility has caused approximately 17% of future supply to be disrupted over the next 3 to 5 years, equivalent to 4-5% of global LNG supply. Oil and European natural gas prices, TTF, continued to rise sharply this week. All three central banks’ meetings exposed hawkish responses to energy inflation, further strengthening the linkage between front-end rates and commodity prices rather than cooling it.

The traders warn that Iran currently holds the greatest energy leverage over the global economy. The likelihood of the Strait of Hormuz reopening quickly is very low, and energy prices remain biased upward. If energy pressures persist, the ECB and BoE will raise interest rates sooner than previously expected. Without large-scale fiscal responses, the significant tightening of front-end rates priced into policies indicates notable downside growth risks.

Iran’s attack reshapes LNG supply dynamics

The trigger was Iran’s attack on Qatar’s Ras Laffan LNG facility, which accounts for about 20% of global LNG supply. The shutdown caused by the attack is expected to last 3 to 5 years, amounting to 4-5% of global LNG supply.

Goldman traders believe this attack reveals two key points: first, Iran’s chosen escalation path and its leverage to influence the global economy by pushing up energy prices; second, the long-term structural damage to supply, with longer durations increasing the risk of insufficient European gas storage levels next winter.

The report notes that the longer the conflict persists, the broader the distribution of upward energy price movements, and even if an eventual resolution occurs, normalization could take longer.

The path to a quick reopening of the Strait of Hormuz currently appears very narrow, and the upward movement in energy complex convexity remains intact.

Central banks missed opportunities to calm markets this week

All three major central banks appeared this week but failed to prevent further sell-off in front-end rates through policy communication, instead reinforcing market expectations of rate hikes driven by energy inflation. Goldman Sachs traders believe, “The shadow of 2022 is clearly visible,” and vigilance against a resurgence of inflation prompts hawkish stances.

The report concludes that the Fed, ECB, and BoE have all failed to contain the sell-off in front-end rates, with their reaction functions further catalyzing the high-beta relationship between energy and rates.

The BoE was the most hawkish and surprising among the three this week. It removed language indicating an easing bias from its policy statement, replacing it with “ready to act at any time,” and explicitly mentioned the possibility of tightening in the event of “large or prolonged shocks.”

Goldman traders expressed confusion: “Given the still-weak labor market and the already restrictive policy stance, it’s hard to understand the BoE’s reaction logic.” At market close this week, rate hike pricing for the year reached 88 basis points. The report suggests this is somewhat high given the UK’s limited fiscal space, but with such strong price action, humility is warranted.

The ECB keeps options open but has a clear rate hike path

ECB President Lagarde’s comments this week were described by Goldman traders as “calm and balanced,” but all options remain on the table. The most notable aspect of this meeting was the forecast report, which showed that the transmission of energy shocks to core inflation is higher than previously expected, indicating rising risks of second-round effects.

The ECB’s forecast includes baseline, adverse, and severely adverse scenarios. Goldman estimates these correspond to 25 basis points, 50-75 basis points, and 100-150 basis points of rate hikes, respectively. The report further estimates that in the adverse scenario, market prices imply oil at about $119 per barrel and natural gas at €87 per MWh, still slightly above current levels.

Goldman believes that based on scenario analysis, a 50 basis point hike “feels reasonable,” but current market pricing exceeds this. Hawkish members after the meeting explicitly stated that if Middle East tensions do not ease quickly, action will be taken promptly.

Fed: The highest hurdle for rate hikes

This week’s Fed meeting results showed only one member leaning toward rate cuts (compared to Goldman’s previous expectation of three). Powell noted that unemployment remains broadly stable, private sector net employment creation has recently approached zero, and may be at a breakeven point; inflation and employment risks are considered equally important. The impact of oil shocks on inflation expectations is taken seriously amid five years of high inflation, and a “mild restrictive” policy remains appropriate.

The market has fully priced in rate cuts by 2026 this week, aligning with other developed markets. Goldman holds a neutral stance on current front-end US rates.

The report also notes that, under new Fed Chair Warsh, the US has a higher hurdle for rate hikes than other countries. Despite the resilience of US equities during this crisis, a larger correction could shift market focus to growth shocks, with the Fed likely to be the first to respond—benefiting from its relatively low energy exposure and dual mandate.

Fiscal responses remain a key variable

As rate hike expectations in Europe and the UK accelerate again, the yield curve has sharply flattened, and markets are pricing in a slowdown in forward growth. However, Goldman traders emphasize that the ultimate trajectory of growth largely depends on fiscal responses.

For example, the UK’s recent spring budget update shows only £23.6 billion in fiscal space through 2029/30. Goldman roughly estimates that just the movements in interest rates and inflation markets have already reduced fiscal space by about £12 billion, leaving very limited room. In comparison, UK government spending on energy price support in 2022-2023 was about £60 billion.

The report suggests that without large-scale fiscal support, the current market-implied policy tightening path would entail significant downside growth risks, with the flattening curve likely to persist. More broadly, financial conditions are tightening across the board, with the UK tightening most aggressively, followed by the US.

Goldman traders conclude with their core view: “The convexity of energy prices remains biased upward, and the longer the conflict persists, the more persistent the supply damage, broadening the upward distribution.”