Iran Counteroffer Rejected

MACRO FRAME

With the US-Iran deadlock continuing, Tuesday’s inflation data will be the next catalyst in pricing rate expectations out of the Fed. Equity markets have largely shrugged off higher energy prices since the ceasefire, though still remain sensitive the negative developments between the warring countries.

STOCK INDEX FUTURES

Equity index futures were directionless overnight after President Trump called Iran’s response to a US peace proposal “totally unacceptable.” Oil prices rose roughly 3% in response, with Brent crude up 3% to over $104 a barrel. However, recent dynamics have shown that equity prices are less sensitive to oil prices than in the early days of the war, in part due to the AI trade resurging in the last couple of weeks. Trump will also be meeting with Chinese President Xi later in the week, where trade controls for products such as AI chips, airplanes, rare earths, and soybeans will be discussed. The trip to China is likely to be the main event of the week. Consumer price index data for April will be out Tuesday and will be keenly watched for signs on if higher energy prices are feeding into broader price pressures; CPI is expected to run 0.6% higher in April and land at 3.7% YoY. Friday’s labor report showed the economy added 115,000 jobs, exceeding the consensus forecast of 62,000-67,000 and showing continued modest labor market expansion. The unemployment rate remained unchanged at 4.3% with 7.4 million unemployed. February’s payroll change was revised down by 23,000 (from -133,000 to -156,000), while March was revised up by 7,000 (from +178,000 to +185,000), resulting in a net downward revision of 16,000 jobs between the two-months.

The VIX is trading at 18.13, up 0.94 points (+5.47%) from Friday’s close of 17.19, reflecting rising hedging demand on faltering U.S.–Iran peace talk headlines and a firmer long-end yield to start the week. A reading in the upper half of the moderate 15–20 zone, argues for a mildly defensive posture into the open even as the indexes hover near unchanged.

The June S&P is trading at 7,411.50, down 0.10% from Friday’s settlement of 7,419.00, within an overnight range of 7,390.50 to 7,420.75. Near-term support is seen at 7,390.50 (overnight low), with initial resistance at 7,420.75 (overnight high) and the 7,500 round number above. The S&P 500 cash ($SPX) closed Friday at a record 7,398.93, holding +7.56% above its 50-day SMA of 6,857.37 and +9.54% above its 200-day SMA of 6,754.51.

The June Nasdaq is essentially unchanged at 29,332.25, flat versus Friday’s settle of 29,332.50, within an overnight range of 29,225.75 to 29,399.75. Initial support is at 29,225.75 (overnight low), with resistance at 29,399.75 (overnight high) and the 29,500 round number above. The Nasdaq 100 cash ($IUXX) closed Friday at a record 29,234.99, sitting +14.56% above its 50-day SMA (25,519.09) and +17.15% above its 200-day SMA (24,956.32) — the most extended of the three indexes.

The June Dow is the laggard at 49,606, down 0.17% from Friday’s settle of 49,691, within an overnight range of 49,468 to 49,709. Support sits at 49,468 (overnight low), with resistance at 49,709 (overnight high) and the 50,000 round number above. The DJIA cash ($DOWI) closed Friday at 49,609.16, holding +3.62% above its 50-day SMA of 47,875.49 and +4.81% above its 200-day SMA of 47,331.64.

Watch point: Stronger-than-expected earnings, big tech dominance, and strong labor market data would otherwise support a continuation of last week’s rally. However, Trump’s apparent rejection of Iran’s peace proposal is likely to offer resistance to further gains in the absence of clarity.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.12% higher at 98.02. The dollar is gaining on a mild safe-haven bid amid Trump’s response to Iran’s peace proposal, which has turned oil prices higher. Friday’s labor data has also reinforced the market narrative that the Fed will keep a hold on rates for the near-future, offering some underlying support though expectations that the European Central Bank and the Bank of Japan will hike rates soon partly dismisses the interest differential backdrop. Tuesday’s CPI inflation data is likely to show a hot print, which could further reinforce expectations and even shift market-implied odds to favor a hike, a dynamic which would be positive for the dollar.

Watch point: Stalled optimism around a US–Iran resolution will leave focus on CPI data and Trump’s visit to China this week. Coming off a hot labor report for April, markets will look to the inflation data to question whether the Fed can maintain its easing bias.

EURO: The euro is 0.12% lower at $1.1770 to start what will be a light week on the economic calendar for the Eurozone.  Developments regarding the US-Iran conflict will continue to be the dominant factor in price direction for the euro; upward moves in oil are likely to pressure the currency. Still, interest rate differentials for the ECB could provide support against the dollar. Markets are pricing a 83% chance of a hike at the June meeting and are nearly priced for two additional rate hikes by year-end. However, the ECB maintains a well-positioned stance on policy and it could be too early to justify a rate hike without further evidence of oil-induced inflation pressures across the broader economy, especially as markets appear to be looking past the US-Iran conflict, expecting a resolution in the coming weeks.

BRITISH POUND: Sterling is 0.17% lower at $1.3612 as markets assess local elections in the UK, which saw Prime Minister Starmer’s Labour Party suffer heavy losses. FX markets have shown a relatively calm reaction, indicating that the results had largely been priced in, though downside risk for the pound still remains amid growing calls for Starmer to step down. A resignation of Starmer could raise expectations that a new Labour leader will increase fiscal stimulus and raise gilt issuance, weighing on the pound. Still, Starmer had repeatedly said he will not step down, though the situation remains the fluid and a key driver in price direction for the pound, apart from US-Iran development.

As for the Bank of England, money markets are pricing a 44% chance of a hike at its June meeting, a rise from last Thursday’s 32%, though well below 55% priced last Monday. The drop in expectations reflects the weakness in the UK economy, which is expected to limit overall tightening from the BoE.

JAPANESE YEN: The yen slipped 0.27% overnight to 157.11 yen per dollar. US Treasury Secretary Bessent is visiting Japan this week, lending focus to whether or not the US will join Japan in its efforts limit selling of the Yen through official buying in the currency market. For the moment, official intervention has been limited solely to Japan. During his three-day stay, Bessent is expected to meet Finance Minister Satsuki Katayama and Prime Minister Sanae Takaichi. Recent interventions from the Japanese government alongside repeated verbal warnings from officials are keeping the yen in a tighter range and limiting selling pressure against the currency. The 160 level is a pain threshold for the government, given recent instances of government intervention, which is likely to act as solid support for the currency. Markets now pricing a 70% chance of a hike come June. Further expectations/confirmation of a June rate hike will offer the yen support.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7248. Equity markets showed a relatively muted reaction to President Trump’s seeming rejection of Iran’s response to a US peace proposal, which has so far limited the downside in the Aussie. The Aussie is enjoying interest rate differential support against major peers after the Reserve Bank of Australia raised the cash rate to 4.35% the other week, though the bank did hint that future moves may be on hold. In the near-term, this week’s annual budget release will draw focus on any signs of fiscal tightening. The government has pledged a restrain in spending to help limit inflationary pressures in the economy. The budget is expected to show a narrower deficit of around A$25 billion, compared to earlier forecasts of A$37b, driven by higher commodity prices and tax revenues. Markets imply around a 19% chance of a hike in June, but are fully priced for a raise to 4.60% by September. However, a reopening of the Strait this month would likely result in the board holding on rates. The main downside risk for the Aussie in the near term remains the geopolitical bid.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to keep the RBA on a tightening path.

TREASURY FUTURES

Yields are little changed across the curve. Friday’s labor report did offer some stability for markets and has cooled fears that the US-Iran conflict has materially damaged the labor market. However, that assumption still remains untested with laggard-effects still taking place. Despite the strong headline reading, the report did come with some signs of weakness: the 445,000 surge in involuntary part-time workers to 4.9 million, the largest monthly increase in roughly two years, signals that employers are cutting hours rather than maintaining full-time positions, while the broader U-6 underemployment measure jumped to 8.2% even as the official unemployment rate held steady at 4.3%, revealing widening slack beneath the surface. Additionally, short-term unemployment spiked by 358,000 to 2.5 million and the labor force participation rate fell to 61.8%, its lowest level since October 2021, suggesting workers are either losing jobs more frequently or dropping out of the workforce entirely. Healthcare’s dominance continues to mask deeper weakness, as the sector has added 618,000 jobs over the past year while all other sectors combined have shed 367,000 positions, with the labor market essentially losing ground for 10 of the last 12 months when healthcare is excluded. G

Tuesday’s CPI data will be keenly watched for signs on if higher energy prices have found their way into the broader economy. Street consensus is looking for headline CPI of around +0.6% MoM and +3.7% YoY. For core, consensus is near +0.3% MoM / +2.7% YoY. Robinhood prediction markets currently price a ~73% probability of CPI YoY above 3.6% and ~35% above 3.7%.

Current levels: 3M 3.682% (-0.3 bp from 3.685%), 2Y 3.912% (+1.9 bps from 3.893%), 5Y 4.036% (+2.3 bps from 4.013%), 10Y 4.382% (+1.8 bps from 4.364%), and 30Y 4.961% (+1.4 bps from 4.947%). The 2/10 spread stands at 46.60 bps (from 47 bps), 5/30 at 93 bps (-1 bp narrower from 93 bps), and 3M/10Y at 70 bps (+2 bps wider, uninverted). With the 5Y up 2.3 bps versus the 30Y up only 1.4 bps, the move is a mild bear flattening at the long end — the front end is repricing slightly hawkishly as the labor market shows no urgency for Fed easing, while the long end is contained by Wednesday’s QRA-confirmed coupon stability and 3Y-Note pre-auction concession setup.

Watch point: Fed policy is poised to stand pat for the time-being, though a path to loosening remains open. Well-anchored inflation expectations should offer resistance to higher yields, while also supporting the case for Fed easing later in the year.

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