Tech Sector Gets Boost from Nvidia

MACRO FRAME

Global equity markets appear to be treating US-Iran talks to reopen the Strait of Hormuz as a done deal, leaving Friday’s labor report as the key risk event in its potential Fed policy implications.

STOCK INDEX FUTURES

Equity index futures moved higher overnight as investors looked past the recent flare up in strikes between the US and Iran, with the tech sector leading gains after Nvidia announced its new RTX Spark Superchip, which is set  to rival AMD and Intel. Nvidia’s new offering adds fresh momentum to the tech sector, which has largely been responsible for the market’s rally in recent weeks. However, broader market gains were relatively muted as the rise in oil prices overnight limited gains. Despite the overnight strikes between the US and Iran, investors largely believe that both sides will come to terms with the 60-day memorandum of understanding to extend the ceasefire. The agreement still requires President Trump’s formal sign-off, and the nuclear issue is likely to remain contentious in the face of reaching an agreement. Despite the geopolitical backdrop, oil’s influence on equity markets has diminished considerably with the dominant market driver being AI, which has driven strong gains across chip stocks and materially lifted profit and earnings forecasts. With corporate fundamentals improving since the conflict began, the strategic significance of the Strait of Hormuz has receded in the eyes of equity investors. This week’s big event is May’s nonfarm payrolls report; another strong report like April’s would reinforce the view that rate cuts are unlikely in the near term, especially if it shows robust wage gains. Conversely, a downside surprise could stoke recession fears while prompting markets to reassess the outlook for policy easing.

Watch point: Details regarding tanker traffic through the Strait will be a catalyst for global markets and may significantly reprice expectations over Fed policy, though negotiations are likely to need further time.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.15% higher at 99.06, moving in line with the rise in oil prices following the flare up in strikes between the US and Iran. Currency markets are largely awaiting further developments around peace talks between the two countries ahead of jobs data at the end of the week, which could reshape some expectations over Fed policy. With the overnight strikes, currency markets are in wait-and-see mode, looking for progress in one direction or another.

April’s PCE data reinforced the narrative that inflation is too high for the Fed to begin thinking about cutting rates, which should offer the dollar some support in the face of risk-on flows away from the dollar. Still, traders await a comprehensive peace deal and restoration of oil flows through the Strait, which could unwind flight-to-quality longs and see the dollar drop substantially. Underlying fundamentals remain mildly supportive of the dollar given the inflationary backdrop and recent statements from FOMC members, though the dollar could slip on hawkish signals from the European Central Bank, which is expected to raise rates this month. Money markets have placed odds of a December rate hike at 50%.

Watch point: Currency markets are in wait-and-see mode ahead of Friday’s labor report and any further developments between the US and Iran.

EURO: The euro is 0.12% lower at $1.1647 in reaction to US-Iran developments and final manufacturing PMI data from the eurozone and Germany. The bloc’s headline PMI slid to a 2-month low of 51.6, down from April’s 47-month high of 52.2, while Germany’s print of 50.1 narrowly avoided a contractionary reading. The key narrative for the eurozone is the divergence between output and demand: production is still technically expanding, but the war-related stockpiling that lifted April’s reading is fading. New orders turned negative and export orders fell at their sharpest in over a year, indicators which could reflect broader economic conditions and limit the scope of policy tightening from the ECB. Looking ahead, flash estimate eurozone CPI inflation data for May are due on Tuesday and should provide the highlight of the region’s data for the week. Money markets are placing an 97% chance of a hike at the June meeting and see 60 bps of tightening by year-end. For the euro, broader risk sentiment will continue to determine price direction, while the interest rate differential against the dollar remains unfavorable given the recent shift in Fed expectations.

Watch point: While a June rate hike remains the favorable move from the ECB, a peace deal and restoration of oil flows through the strait is likely to reduce  tightening expectations.

BRITISH POUND: Sterling is little changed at $1.3466 as investors remained cautious over the potential US-Iran deal. Nationwide’s house price survey for May showed home prices fell 0.6% MoM, below estimates of a 0.1% drop, suggesting that some momentum in the housing sector has eased following the rise in mortgage rates. Recent comments from Bank of England Governor Andrew Bailey suggested that the Bank of England has no immediate desire to move on policy, as Bailey said that allowing inflation to run above the BoE’s 2% target was justified given uncertainty over the economic impact of the Iran war and the weak pace of growth. His comments suggested that policymakers can afford to wait before making any rate moves. Money markets are pricing just a 9% chance of a hike at its June meeting and see 36 bps of tightening by year-end, which is substantially lower than market-pricing two weeks ago, though still rests above our base case of no change in policy. While the UK remains under the cloud of uncertainty related to political leadership, statements from PM front-runner Andy Burnham that he would stick to the UK’s fiscal rules, have calmed currency markets and relieved pressure the Sterling.

JAPANESE YEN: The yen is 0.13% lower at 159.45 yen per dollar, remaining near the 160 level, which has previously brought intervention from government authorities. Data on Friday showed annual core inflation in Tokyo stayed below the central bank’s 2% target for a fourth straight month in May. Still, it is unlikely that the Tokyo inflation reading will deter Bank of Japan policymakers from wanting to raise rates at their June meeting. Bank of Japan Governor Ueda will give a speech on Wednesday, which could offer hints on the timing of the central bank’s next move, which money markets expect to be a rate hike at the June meeting. Odds of a hike at the June meeting are priced at 72%, while the market sees a total of 42 bps of tightening by year-end. Intervention risk continues to offer the currency support near the 160 level, which has previously seen intervention from government authorities in the currency market.

AUSTRALIAN DOLLAR: The Aussie is 0.18% lower at $0.7170 but traded mostly sideways overnight as traders await a possible US-Iran deal. The Reserve Bank of Australia has broadly signaled that it is in a wait-and-see mode following three rate hikes earlier this year. CPI data last week missed expectations, with prices in April rising 0.4% MoM, below forecasts for 0.6%. Annual  inflation slowed to 4.2% from 4.6%, though that was in part because of government tax break on petrol. However, the key trimmed mean measure of core inflation rose 0.3% as expected, taking the annual pace up to 3.4%, which is likely to keep the Reserve Bank of Australia on its tightening bias. Markets have slashed tightening expectations, implying a 6% chance of a June hike to the 4.35% cash rate, while a December hike is priced at 61%. Australia will release Q1 GDP data on Wednesday, forecasts are expecting 0.5% quarterly gain. RBA Governor Michele Bullock will speak before lawmakers on Thursday and Deputy Governor Andrew Hauser will speak on Friday.

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, moving higher at the front end and lower at the long end with mostly sideways trading overnight. There is a host of labor data this week, with Tuesday’s JOLTS data for April and May’s nonfarm payrolls report on Friday. Both events are likely to shape Fed policy expectations, though the base case for policy in our opinion is a continuation of the status quo. With recent data, including weekly claims and previous hiring figures suggesting a stable labor market, Friday’s data will need to see a serious drop in hiring to get the market excited about rate cuts this year. The Chicago Fed’s Real-Time Unemployment Rate Forecast for May is 4.32%, edging down from the prior BLS reading of 4.34%. The modest improvement is largely attributable to a slight decline in separations, as reflected in the Chicago Fed’s Layoffs and Other Separations Rate.

Treasury markets continue to take directional cues from oil prices, as a sustained move higher in crude would carry the greatest risk of re-anchoring embedded inflation expectations at elevated levels. The 10-year yield has tracked the trajectory of December Brent crude closely over recent months, though there are emerging signs that this correlation is beginning to soften. Fed Governor Powell, warned in a speech on Sunday about politicization of monetary policy, highlighting ongoing threats to the Fed’s independence. Elsewhere, the Fed’s Hammack, ​Logan and Daly are among policymakers due to speak later in the week.

Watch point: The path to loosening has appears nonexistent 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.

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