US Pauses Planned Attacks

MACRO FRAME

Global bond yields remain elevated as markets eye the await the outcome of President Trump’s “pause” on attacks. While tech/AI leadership may continue to provide a floor, the combination of firmer energy-driven inflation, heightened Fed tightening expectations, and rising geopolitical risk leaves risk sentiment vulnerable heading into retail earnings reports this week.

STOCK INDEX FUTURES

Equity index futures moved lower overnight. US attacks against Iran originally scheduled for Tuesday were delayed due to “substantial negotiations,” although President Trump explicitly stated the US can hold off only “another day or two”. US strike would spark further oil price gains, extend the inflation shock, and trigger a broad risk-off selloff as markets fear an Iranian counterattack; on the other hand, a deal would instantly reverse recent trends across equities, treasuries, metals, and currencies with significant relief rallies.

The CFTC’s recent COT data underscores broader sentiment that the post-earnings environment for the indexes is rather bearish, or at least consolidated with traders flipping to or adding to net shorts on the Nasdaq and S&P. In the near-term, the challenge for the equities remains elevated yields, expectations of policy tightening from the Fed, high oil prices, and rising geopolitical anxiety around Iran. Meanwhile, as earnings season wraps up, so does the tailwind effect it had on equities. Nvidia’s quarterly results tomorrow will be under the microscope and is likely to be a catalyst for market direction and tech-enthusiasm. Elsewhere, Home Depot reaffirmed its outlook, though stated that the average consumer was beginning to feel the pressure from higher gas prices.  Walmart and Target earnings later this week will provide further insights on how consumers are holding up.

Watch point: The lack of an outcome at the US-China visit has turned sentiment bearish and lead to a wave of profit-taking. Additionally, markets await the outcome of President Trump’s pause on strikes.

CURRENCY FUTURES

US DOLLAR: The USD index is little changed at 99.21, largely pausing its recently rally amid the Iran ceasefire extension. While the bias for the dollar remains higher given current conditions, a peace deal or framework as an outcome of President Trump’s announcement of a ceasefire extension could unwind flight-to-quality longs and see the dollar drop substantially. Still, underlying fundamentals remain solidly bullish for the dollar: the US interest rate differential continues to expand as a Fed rate hike becomes increasingly expected by markets in later months. Odds of a December rate hike continue to hover around 47%. While recent labor data did reveal some notable spots of weakness, the overall market narrative is that the Fed will keep a hold on rates while a growing chorus of participants are beginning to expected a move upwards.

Watch point: Stalled optimism around a US–Iran resolution will continue to offer safe-haven support for the dollar. Fed policy expectations are likely to reinforce near-term dollar strength, though a peace deal could unwind recent strength.

EURO: The euro is 0.33% lower to $1.1620, approaching technical support levels. Dollar strength remains the prevailing theme in currency markets with oil prices higher and jitters over geopolitics. For the euro, the prospect of slower economic growth and higher interest rates as a result of the US-Iran conflict reinforce downward pressure on the currency as the eurozone remains particularly vulnerable to the energy crisis. Eurozone growth slowed to 0.1% in Q1 2026, while inflation rose to 3% in April, the highest since September 2023. S&P Global PMI survey out later in the week will give investors another chance to reassess further monetary policy expectations. Markets are currently pricing a 85% chance of a hike at the June meeting and are nearly priced for two additional rate hikes by year-end.

BRITISH POUND: Sterling fell 0.16% to $1.3386 after data showed UK employers cut hiring and posted fewer jobs. Early payroll data revealed a drop of 100,000 jobs in the month from March, and estimates of hiring for the previous four months were lowered. The unemployment rate ticked up to 5% for the first quarter, from 4.9% in Q1, a development which is likely to also add pressure on Prime Minister Starmer. The ONS said lower-paying sectors saw some of the largest falls in employment per the recent data and over the last year. Growth in wages, excluding bonuses, stood at 3.4% in the first three months of 2026 compared with the same period last year, the slowest increase since 2020. Money markets are pricing a 29% chance of a hike at its June meeting, a sharp drop from Monday’s pricing of nearly 40%.

JAPANESE YEN: The yen slipped 0.11% to 159.03 yen per dollar. Data out overnight showed Japan’s economy grew at a YoY rate of 2.1% in Q1, supporting expectations for a rate hike from the Bank of Japan. However, anticipation of details surrounding the government’s additional budget plan, which markets fear will strain public borrowing, is keeping the yen on the backfoot. Meanwhile, the yen has fallen closer to the 160 level, which is a notable pain point for the government and has triggered intervention in recent weeks.

Markets are pricing a 67% chance of a hike from the Bank of Japan come June. Recent wholesale inflation data has bolstered the case for the BoJ to tighten policy. For the yen, intervention alone is likely not going to be sufficient enough to strengthen the currency given Japan’s vulnerabilities to higher energy prices.

AUSTRALIAN DOLLAR: The Aussie fell 0.70% to $0.7118. The Aussie has been subject to rapid changes in sentiment in recent trading sessions, often trading the mood regarding developments out of the gulf. Interest rate differential support for the Aussie is also waning a the spread between Australian 10-year and US 10-year has fallen to its weakest level this year at 45 basis points, down from 75 basis points a month ago. The Reserve Bank of Australia is still expected to raise rates one more time this year, though against the backdrop of a hike in Fed policy, interest rate differential support is not as strong as a factor. Markets imply around a 18% chance of a June hike to the 4.35% cash rate, while the probability of an August hike to 4.60% slipped to 62%.

TREASURY FUTURES

Yields inched higher across the curve as the bond market approaches oversold conditions. The 9-day RSI on bonds is under 30, daily stochastics are in oversold territory, and yesterday’s closing price reversal was a positive technical signal. While those conditions could spur a relief rally, underlying inflation fundamentals are structurally bearish for bonds, especially as expectations of a hike in policy from the Fed grow, absent any developments in the Gulf. Yesterday’s TIC flows showed foreign purchases of Treasuries near the lower end of a six-year sideways consolidation, suggesting foreign buyers, though the surge in yields could attract buyers ahead.

Arthur Budaghyan of BCA research noted that over the past 30 years, when the two-year yield has moved above the Fed Funds rates, it has reliably signaled the next move from the Fed would be a hike and vice versa. Now, with the two-year yield 25 bps above the upper-bound of the Fed Funds rates, alongside surging inflation for both consumers and producers, suggests that the next move might be a hike. Even if fuel prices are ignored, the median and trimmed mean inflation components are rising. Sticky prices have ticked back up above 3%, while the Fed’s supercore (services inflation minus shelter) broke above 3% indicating there is more to inflation than the first-order effects from the oil shock. Bond yields have risen in such a way that suggests the Fed is behind the inflation curve, presenting Warsh with a potential bond market revolt if he presses for lower rates.

Watch point: The path to loosening has faded materially as inflation has evidently become more broad based. We no longer expect the Fed to lower rates in 2026 as building inflationary pressures are evident in stickier readings. However, a swift reopening of the Strait in the next month would open the door for a path to easing.

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