Goldman Sachs traders have issued a warning that, following Iran's attack on the world's largest LNG facility, energy prices have become the core variable driving the trajectory of all macro assets. The Federal Reserve, the European Central Bank, and the Bank of England, during their respective policy meetings this week, not only failed to stabilize markets but, through their hawkish stances, intensified the high sensitivity of front-end interest rates to energy prices.

Goldman Sachs macro traders Cosimo Codacci-Pisanelli and Rikin Shah stated in a report that the attack by Iran on Qatar's Ras Laffan liquefied natural gas facility is expected to disrupt approximately 17% of supply for the next 3 to 5 years, equivalent to 4-5% of global LNG supply. Consequently, crude oil and European natural gas prices (TTF) continued to rise sharply this week. The policy meetings of the three major central banks this week all revealed a hawkish reaction function to energy-driven inflation, further strengthening the linkage between front-end rates and commodity prices rather than cooling it.

The two traders warned that Iran currently holds the most significant leverage over the global economy through energy. The likelihood of a swift reopening of the Strait of Hormuz is extremely low, and the convexity of energy prices remains skewed to the upside. If energy pressures persist, interest rate hikes from the ECB and the BoE could occur sooner than previously anticipated. In the absence of a large-scale fiscal response, substantial market pricing for policy tightening at the front-end of the yield curve implies significant downside risks to growth.

The trigger for this event was Iran's attack on Qatar's Ras Laffan LNG facility. This facility accounts for roughly 20% of global LNG supply, and the production halt caused by the attack is expected to last 3 to 5 years, a scale equivalent to 4-5% of total global LNG supply.

The Goldman Sachs traders believe this attack reveals two key points: first, Iran's chosen path of escalation and its willingness to leverage its influence on the global economy by pushing energy prices higher; second, the long-term structural damage to the supply side from the conflict. The longer the disruption lasts, the higher the risk of insufficient European gas storage levels next winter.

The report notes that the longer the conflict persists, the wider the potential distribution for upward moves in energy prices. Even if the situation eventually moves towards de-escalation, the time required for a return to normalization could be prolonged. The path to a swift reopening of the Strait of Hormuz appears extremely narrow, and the directional bias for energy price convexity remains upward.

The three major central banks all presented their policy decisions this week but failed to halt further selling in front-end rates through their communication. Instead, they reinforced market pricing for interest rate hikes in response to energy inflation. The Goldman Sachs traders observed that "the shadow of 2022 is clearly visible," with central banks' vigilance against resurgent inflation leading them to proactively adopt a hawkish stance.

The report concluded that the Fed, ECB, and BoE all failed to control the wave of selling in front-end rates. The central banks' reaction functions have instead become a new catalyst for the persistence of a high-beta relationship between energy prices and interest rates. The Bank of England was the most hawkish and surprising of the three this week. It removed language suggesting an easing bias from its policy statement, replacing it with a pledge to be "ready to act," and explicitly mentioned the possibility of tightening policy in response to "large and persistent shocks."

The Goldman Sachs traders expressed confusion regarding this move: "Against a backdrop of a labour market that is still clearly softening and a policy stance that is already restrictive, the BoE's reaction function is difficult to understand." By the market close this week, pricing for rate hikes within the year had reached 88 basis points. The report views this pricing as elevated, given the UK's limited fiscal space, but suggests maintaining some humility in the face of such strong price action.

ECB President Christine Lagarde's statements this week were described by the traders as "steady and balanced," while keeping all policy options on the table. A key takeaway from the meeting was the updated forecasts, which showed that the pass-through effect of the energy shock to core inflation is higher than previously expected, indicating rising risks of second-round effects.

The ECB's projections outlined three scenarios: baseline, adverse, and severely adverse. Goldman Sachs estimates these scenarios correspond to a 25 basis-point hike, a 50-75 bps hike, and a 100-150 bps hike, respectively. The report further estimates that the adverse scenario corresponds to market prices of approximately $119 per barrel for oil and €87 per MWh for gas, levels still slightly above current market prices.

Goldman Sachs believes that, based on this scenario analysis, a 50 bps hike "feels reasonable," while current market pricing has already surpassed this level. Hawkish ECB Governing Council members indicated after the meeting that if the Middle East situation does not ease quickly, they would push for prompt action.

The results of this week's Federal Reserve meeting showed that only one FOMC participant leaned towards a rate cut (Goldman Sachs had previously expected three). Chair Powell noted that the unemployment rate is broadly stable, and recent net private-sector job creation is near zero, possibly at a breakeven level. Inflation and employment risks were placed on equal footing, with the impact of the oil price shock on inflation expectations being taken seriously against the backdrop of five years of high inflation. A "moderately restrictive" policy stance remains appropriate for now.

Market pricing for Fed rate cuts in 2026 was fully digested this week, bringing it in line with other developed markets. Goldman Sachs maintains a neutral stance on US front-end rates at current levels.

The report also pointed out that under the leadership of the new Fed Chair, the threshold for the Fed to hike rates remains higher than in other countries. Throughout this crisis, US equities have shown surprising resilience overall. However, a more substantial market correction could shift focus towards growth shocks, potentially making the Fed the first central bank to respond—benefiting from its relatively lower exposure to energy and its dual mandate.

The ultimate direction of growth will heavily depend on whether fiscal responses materialize. As rate hike pricing accelerates again in Europe and the UK, and yield curves bear-flatten significantly, markets have already begun pricing in a forward growth slowdown.

Using the UK as an example, the Spring Budget update earlier this month indicated fiscal headroom of only £23.6 billion by 2029/30. A rough estimate by Goldman Sachs suggests that movements in interest rate and inflation markets alone have already reduced this headroom by approximately £12 billion, leaving very limited room for maneuver. For comparison, UK government spending on energy price support in 2022-2023 amounted to around £60 billion.

The report argues that without large-scale fiscal support, the current market-implied path of policy tightening signifies significant downside risks to growth, and the trend of yield curve flattening is likely to persist. More broadly, financial conditions are tightening across the board, most aggressively in the UK, followed by the US.

In their summary, the Goldman Sachs traders maintained their core assessment: the convexity of energy prices remains skewed to the upside. The longer the conflict lasts, the more persistent the supply damage becomes, and the wider the potential distribution for price increases.