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

Ask AI · Why do hawkish central bank policies intensify the sensitivity of front-end interest rates to energy prices?

Goldman Sachs traders warn that energy prices have become the core driver of all macro asset movements following 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 the high sensitivity of front-end interest rates to energy prices through hawkish stances.

In a report, Goldman Sachs macro traders Cosimo Codacci-Pisanelli and Rikin Shah stated that the attack on Qatar’s Ras Laffan LNG facility by Iran could cause approximately 17% of supply disruption over the next 3 to 5 years, equivalent to 4-5% of global LNG supply. Oil and European natural gas prices (TTF) continued to surge significantly this week. The hawkish response functions to energy inflation at the central banks’ meetings this week further strengthened the linkage between front-end interest rates and commodity prices, rather than cooling it down.

The two traders warn that Iran currently holds the greatest energy leverage over the global economy. The likelihood of a quick reopening of the Strait of Hormuz is very low, and the convexity of energy prices remains upward biased. If energy pressures persist, the ECB and BoE’s rate hikes could occur sooner than previously expected. In the absence of large-scale fiscal responses, the significant pricing of policy tightening in front-end rates implies notable downside growth risks.

Iran’s attack reshapes LNG supply dynamics

The trigger for this event 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 Sachs 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 caused by the conflict, with longer durations increasing the risk of insufficient European gas storage levels by next winter.

The report notes that the longer the conflict persists, the broader the upward distribution of energy prices, meaning that 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 convexity movement of the energy complex remains upward.

Central banks missed the opportunity to calm markets this week

This week, the three major central banks appeared collectively but failed to prevent further selling of front-end rates through policy communication, instead reinforcing market expectations of rate hikes driven by energy inflation. Goldman Sachs traders believe that “the shadow of 2022 is clearly visible,” and the vigilance of each bank against a resurgence of inflation has led them to adopt hawkish stances proactively.

The report summarizes that the Fed, ECB, and BoE all failed to contain the sell-off in front-end rates, and their reaction functions have instead become new catalysts for the persistent high beta correlation between energy and interest rates.

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

Goldman Sachs traders expressed confusion: “Given the still clearly soft 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 had reached 88 basis points. The report suggests that, given the limited fiscal space in the UK, this pricing is somewhat high, 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 Sachs traders as “calm and balanced,” but all options remain on the table. The most notable aspect of this meeting is that the forecast report shows 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 Sachs 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 the adverse scenario implies market prices of about $119 per barrel of oil and €87 per megawatt-hour of natural gas, still slightly above current levels.

Goldman Sachs believes that, based on scenario analysis, a 50 basis point hike “feels reasonable,” but current market pricing has already exceeded this level. Hawkish members explicitly stated after the meeting that if Middle East tensions cannot be quickly alleviated, prompt action will be taken.

Federal Reserve: The highest hurdle for rate hikes

This week’s Fed meeting results showed only one member leaning toward rate cuts (compared to Goldman Sachs’ previous expectation of three). Powell noted that the unemployment rate 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 price 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 in 2026 this week, aligning with other developed markets. Goldman Sachs holds a neutral stance on current front-end US rates.

The report also points out that, under new Fed Chair Warsh’s leadership, the US has a higher hurdle for rate hikes than other countries. Despite the surprising resilience of US stocks during this crisis, a larger correction could shift market focus to growth shocks, at which point the Fed would likely be the first to respond—benefiting from its relatively low energy exposure and dual mandate.

Fiscal responses remain a key variable

As rate hike pricing accelerates again in Europe and the UK, the yield curve has begun to steepen significantly, with markets pricing in a slowdown in forward growth. However, Goldman Sachs traders emphasize that the ultimate trajectory of growth largely depends on fiscal responses.

For example, the UK’s spring budget update earlier this month showed only £23.6 billion in fiscal space through 2029/30. Goldman 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 around £60 billion.

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

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