Another Hot CPI Print

MACRO FRAME

Equity index futures are under pressure as the US-Iran deadlock and hotter April CPI challenge the market’s prior assumption that the conflict would remain largely contained from a US macro standpoint. While tech/AI leadership may continue to provide a floor, the combination of firmer energy-driven inflation, more constrained Fed easing expectations, and rising geopolitical risk leaves risk sentiment vulnerable into the Trump-Xi meeting later this week.

STOCK INDEX FUTURES

Equity index futures are lower as US-Iran deadlock and April’s hotter-than-expected CPI reading weigh on sentiment. The US is reportedly weighing limited strikes against Iran in an effort to break the negotiation stalemate after President Trump called Iran’s counteroffer a “piece of garbage.” Fundamentally, the indexes continue to face a challenging geopolitical environment, which is beginning to challenge macro fundamentals in the States. The indexes have previously gained as markets largely believed that the US was generally isolated from the conflict, but today’s +0.6% MoM headline reading and +0.4% MoM core reading are beginning to challenge that narrative by impacting Fed expectations more materially. Energy was unambiguously the story this month, rising +3.8% MoM and accounting for over 40% of the total monthly increase. For now, tech/AI leadership will offer support to the indexes, though risk-sentiment is waning amid the deadlock in the negotiations. Elsewhere, Trump’s meeting with Chinese President Xi later in the week will be closely watched as trade controls for products such as AI chips, airplanes, rare earths, and soybeans will be discussed.

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 rejection of Iran’s peace proposal and April’s CPI print offer resistance to further gains in the absence of clarity

CURRENCY FUTURES

US DOLLAR: The USD index is 0.37% higher at 98.32. The dollar is finding safe-haven demand as the standoff between the US and Iran continues, though did pare some gains following April’s hot CPI print, which revealed the core prices were increasing. Paired with last week’s labor data that has reinforced the market narrative that the Fed will keep a hold on rates for the near-future, the dollar is likely to find solid underlying support amid the continuation of the deadlock in negotiations. However, expectations that the European Central Bank and the Bank of Japan will hike rates soon partly dismisses the interest differential backdrop.

Watch point: Stalled optimism around a US–Iran resolution will offer safe-haven support for the dollar, though declining interest rate differential support opens the door for that advantage to narrow.

EURO: The euro is 0.31% lower at $1.1746, making up some overnight losses following the release of April’s inflation data. 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 88% 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.

Watch point: While a June rate hike remains favored by markets, current policy stance from the ECB and ongoing developments between the US and Iran would otherwise favor a hold from markets. Given that the ECB is well-positioned in its policy stance, a hold at June would appear to be the most reasonable course of action. Still, the meeting remains a month out, leaving room for developments to shape the narrative.

BRITISH POUND: Sterling is 0.51% lower at $1.3612. The pound is facing pressure as Prime Minister Keir Starmer faces increasing calls to resign following heavy losses for the Labour party in local elections last week. Investors are largely worried that a new Labour leader will increase fiscal stimulus and raise gilt issuance, weighing on the pound. However, Starmer said there has been no official move to trigger a leadership challenge. The Sterling is likely to remain under pressure as long as political uncertainty persists, though the nomination of a fiscally conservative candidate could help stabilize sentiment, though that does not appear to be a situation for which the market is expecting.

As for the Bank of England, money markets are pricing a 52% chance of a hike at its June meeting, a rise from last Thursday’s 32%. However, weakness in the UK economy, is expected to act as a limiting factor to overall tightening from the BoE.

JAPANESE YEN: The yen slipped 0.24% overnight to 157.53 yen per dollar. US Treasury Secretary Bessent overnight said that excess volatility in the currency market is undesirable, a move which offers support to Tokyo’s most recent round of currency intervention. Bessent also noted that he believes the Bank of Japan will soon resume hiking rates toward a more normalized policy stance to avoid higher-inflation. Still, Bessent’s comments fell short of expectations of stronger warnings that the US could soon be joining Japan in its efforts. Additionally, overnight the yen briefly jumped from 157.70 to 156.75, spurring speculation that a rate check had taken place. For the moment, official intervention has been limited solely to Japan, though speculation that the US could join in the intervention remains.

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 with the 160 level acting as a level of support. 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 0.23% lower at $0.7232 as uncertainty in the gulf weighs on risk sentiment across markets. The Aussie has found support around $0.7205. Data from Australia overnight revealed that business confidence remained subdued, as higher energy costs pressure profit margins and investment plans. Australia’s 2026-2027 budget points to underlying cash deficits in the mid‑30‑billion range in 2026–27, roughly 1% of GDP, helped by strong commodity‑price‑driven revenue while still accommodating new spending. The figures were in line with market expectations.

Markets imply around a 22% 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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