Inflation Swaps Pricing Higher CPI

MACRO FRAME

Global markets are digesting a synchronized hawkish shift across major central banks layered on top of a worsening Middle East conflict and persistent energy‑driven inflation risks. This combination has driven a sharp repricing in rate expectations: OIS now prices the first full Fed cut only in mid‑2027, while European markets have swung from discounting cuts to pricing one to two ECB hikes next year.

TREASURY FUTURES

Yields are higher as the global hawkish pivot takes shape. Thursday’s session saw a modest bear‑flattening rather than an outright rout. The 2‑year yield climbed 3 bps to about 3.79%, reflecting expectations that the Fed will stay restrictive for longer, while the 10‑year eased 1 bp to 4.25% after briefly touching 4.30% intraday as inflation and energy concerns intensified.

Inflation swaps, a gauge of the outlook for future consumer prices, spiked to a six-month peak of roughly 3.3% in one-year maturities. Suggesting that investors believe that the consumer price index will average more than 3% over the next 12 months, higher than the 2.4% year-on-year CPI reading for February.

The shift in inflation expectations is global: UK 10‑year gilts surged toward 4.88% after the BoE’s unanimous hold and strong inflation warnings, German 10‑year Bund yields pushed to 2.96% near a two‑year high as markets priced in potential ECB hikes, and the BoJ and SNB also signaled tolerance for higher yields while avoiding fresh easing.

Inflation markets are reinforcing the theme: energy‑driven breakeven are wider, while real yields have risen sharply as nominal yields move up and inflation expectations adjust more gradually, contributing to the sell‑off in gold and other long‑duration assets. Fed repricing is particularly stark, with derivatives now indicating the first full 25 bp cut only in June 2027 compared with expectations for year‑end 2026 earlier this week. With today’s US data calendar light, flows tied to triple witching and the S&P 500 rebalance are likely to be the main drivers of rate futures into the close, alongside any surprise headlines on Iran or additional energy‑supply measures.

Watch point: The durability of this week’s hawkish repricing will hinge on whether upcoming inflation and growth data validate central‑bank concerns; for now, higher real yields and a longer‑dated easing timeline remain headwinds for duration and a key macro constraint for risk assets.

The spread between the two- and 10-year yields is 43.50 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.877%.

STOCK INDEX FUTURES

US equity index futures are softer after a third consecutive down day for the major indices, as investors weigh surging energy prices and a coordinated hawkish shift in global central‑bank rhetoric. On Thursday, all major indexes declined but recovered slightly after Treasury Secretary Bessent floated the possibility of unsanctioning around 140 million barrels of Iranian oil at sea. At the same time, Bessent also teased a further SPR release, which helped Brent retreat from an intraday high of 115 dollars per barrel toward the 108–110 area. Overnight, however, S&P 500 and Nasdaq futures weakened again as the energy complex remained firm and central‑bank commentary reinforced a higher‑for‑longer policy path.

In Europe, risk sentiment is more clearly negative. The Euro Stoxx 50 slumped 2.1% to 5,616.15 on Thursday, its worst session in weeks, while the Stoxx 600 dropped 0.7% as surging gas prices and the ECB’s hawkish stance weighed on rate‑sensitive and energy‑intensive sectors. The BoE’s unanimous hold, with former doves citing the Iran conflict as a reason not to cut, pushed Bank Rate expectations higher and contributed to a sharp sell‑off in UK equities. Meanwhile, the Nikkei 225 has fallen more than 10% from YTD highs into formal correction territory amid BoJ hawkish hints and global risk aversion. With today’s US calendar sparse, attention will center on options expiry and S&P 500 index rebalancing, both of which could amplify intraday volatility around an already fragile risk backdrop.

Watch point: Whether incoming US data confirm the Fed’s stronger‑growth, higher‑inflation narrative will be important for equity futures; a sustained move higher in real yields would likely challenge the current attempt at consolidation.

CURRENCY FUTURES

US DOLLAR: The USD index is slightly higher at 99.32, underpinned by higher US and global yields and safe‑haven demand from the expanding Middle East conflict. On Thursday, the DXY slipped as recent gains were offset by strength in the euro and sterling following hawkish signals from the ECB and BoE. Markets have now largely abandoned expectations for Fed cuts in 2026, with OIS pricing the first full 25 bp reduction in June 2027, which should support the USD on a medium‑term horizon even if near‑term performance is uneven.

Watch point: Any confirmation that the Fed share of the global hawkish pivot is hardening—via speeches or further repricing in front‑end rates—would likely re‑anchor DXY toward recent highs despite cross‑currents from EUR and GBP.

EURO: The euro is 0.20% lower at $1.1565, recovering earlier losses as energy prices slipped. Following the European Central Bank’s decision to hold at 2.0%, while revising its 2026 inflation forecast up to 2.6% and flagging “material” risks from the energy shock  has prompted markets to price in one to two hikes next year. President Lagarde’s presentation of adverse scenarios, including inflation of 3.5–4.4% depending on the severity of a prolonged Hormuz closure, underscores the challenge facing Euro‑area policymakers as European gas prices surge on Ras Laffan damage. While the hawkish repricing supports the euro, it also darkens the region’s growth outlook and adds to concerns about European industrial competitiveness.

Watch point: The sustainability of EUR strength will hinge on whether risk sentiment stabilizes and energy prices avoid another leg higher.

BRITISH POUND: Sterling is 0.34% lower to $1.3385. Sterling has rallied on the Bank of England’s hawkish pivot, with GBP/USD climbing toward 1.33 after the MPC voted unanimously to hold at 3.75% and explicitly highlighted second‑round inflation risks from energy. All four previous doves shifted to a hold stance, and market‑implied Bank Rate now slopes higher through 2026, with roughly 60 bp of hikes priced versus expectations for cuts as recently as late February. The message is positive for GBP but negative for UK equities and gilts, where yields have risen sharply in response.

However, the larger question is how long the British economy can weather higher rates. Slow economic growth and rising unemployment raise the possibility of a dovish BoE stance in the later future. Data published earlier on Thursday showed that British wages, excluding bonuses, rose at their slowest pace since late 2020 in the three months to January. However, the figures did show that unemployment steadied at 5.2%.

Watch point: Further upside in sterling may be constrained if UK growth data continue to soften; any sign that the BoE might still tolerate some inflation overshoot to support activity would likely temper the current bullish GBP narrative.

JAPANESE YEN: The yen weakened 0.60% to 158.71. The yen has strengthened modestly after the Bank of Japan held at 0.75% but kept an April hike “on the table,” and hawkish board member Takata dissented in favor of tightening. Governor Ueda framed the war‑related demand shock as likely temporary, signaling that normalization remains in play, while the Nikkei fell more than 3% on Friday, pushing the index into correction territory as investors reassessed the policy path alongside global risk aversion.

Watch point: A confirmed April hike could pull USD/JPY below 155, particularly if US yields stabilize; however, renewed US dollar strength or further escalation in the Middle East could limit yen gains despite BoJ normalization.

AUSTRALIAN DOLLAR: The Aussie fell back 0.16% to $0.7075. The Aussie has been comparatively resilient despite sharp falls in copper and other base metals that typically weigh on commodity‑linked FX. The currency remains supported by the recent RBA hike to 4.10% and still‑positive carry, but Thursday’s 4.8% plunge in copper and the broader industrial‑metals sell‑off underscore rising stagflation worries that could increasingly pressure the Aussie if sustained.

Still, labor market conditions remain tight and supports the Reserve Bank of Australia’s future tightening bias.  Middle East conflict aside, domestic data alone has proven inflationary enough to justify the case for monetary tightening, while the rise in energy prices only adds to that. Inflation risks in the country remain firmly skewed to the upside, as a result of excess demand and higher energy prices. The RBA’s latest February forecasts already penciled in headline inflation reaching 4.2% by mid-year before the war unleashed a fresh global oil shock.

Markets currently imply an additional 70 bps of additional tightening by year-end, with rate hikes expected in June and September.

Watch point: Wage figures, capacity utilization, PMI readings, and other signals on economic momentum will dictate market sentiment over future timing expectations.

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