SIFs Recover From Friday

MACRO FRAME

Global equity markets continue to remain focused on US-Iran peace negotiations and a potential reopening of the Strait. Inflationary pressures continue to mount amid the closure, setting up this week’s CPI data to be the main event of the week.

STOCK INDEX FUTURES

Equity index futures moved higher overnight despite the hangover from Friday and the recent escalation in events in the Middle East. Friday’s massive selloff, resulting from May’s nonfarm payrolls report, triggered fears of reduced AI spending in the economy as it reinforced expectations that the Fed could be moving rates upward.  This week’s big event will be Wednesday’s CPI data, which offers downside risk to equities if inflationary pressures spur market worries that the Fed could raise rates multiple times in the coming months. Forecasts are expecting inflation to rise from 3.8% to 4.2%, with core expected to rise modestly from 2.8% to 2.9%. After an exchange of strikes over the weekend between Israel and Iran, Iran’s military headquarters on Monday said it would be ending strikes.

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.

US DOLLAR: The USD index is down 0.13% to 99.93, after surging demand for dollar liquidity on Friday saw it break out of the 99.00-99.30 range is has largely maintained since mid-May. May’s nonfarm payrolls data has set up conditions for the Fed to raise rates if they choose. Prior to May’s jobs report, traders were already growing more convinced of a Fed hike this year as weekly data showed that investors cut their bullish positions in the euro to the lowest in three months, while adding to bearish bets on the yen, according to LSEG data.

Since the conflict began, the dollar has been a gauge for broad risk sentiment. The main driver of dollar weakness remains risk-on flows in the face of market optimism over an end to the conflict in the Middle East, which markets expect would drop a growing hawkish bias from the Fed. However, pass-through effects from supply chain disruptions and the rise in energy prices are likely to make it difficult for the  Fed to lower rates over the next two quarters even if the Strait was reopened today.

Watch point: Demand for dollar liquidity remains heightened amid the flare up in hostilities, while May’s jobs report has provided the greenback with stronger support, potentially sustaining a break above into a higher range.

EURO: The euro is 0.16% higher at $1.1539. The European Central Bank’s policy decision will be the highlight of the week, though markets have priced in a rate hike from the central bank for some time now, leaving attention on views of policymakers over second-round effects on inflation and whether or not that requires further policy tightening. Comments from policymakers that second-round effects are of major concern are likely to bolster the euro and reinforce expectations of additional rate hikes from the ECB this year. Commentary from the ECB could reflect language that they remain well positioned in an environment of heightened uncertainty. Elsewhere, Germany will release manufacturing orders data on Monday and industrial production data on Tuesday, both for April.

Money markets fully expect a hike at the June meeting and see 67 bps of tightening by year-end. However, a potential factor which could limit the need for additional policy tightening after June, would be that services inflation eased in the most recent data. Still, the ECB maintains the scope to tighten policy without worrying about impacts to economic growth, though the extent to which policy tightening is necessary may be limited to just one rate hike if the Strait is reopened within the month and if services inflation does not pick up. 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 is expected from the ECB, a peace deal and restoration of oil flows through the Strait is likely to reduce tightening expectations.

BRITISH POUND: Sterling rose 0.11% to $1.335 after recovering from its lowest level in nearly two months after Iran said strikes on Israel would be ceased. Despite a dovish repricing of Bank of England expectations, the sterling has gained as a result of the reduction in geopolitical risk and decline in demand for the dollar. While a peace deal would see the pound strengthen on the back of risk-on flows, that would also open the door for a resumption of policy-easing from the BoE later in the year and lend focus back to the economic and political challenges, which were initially pressuring the currency. A fully priced rate-hike has been priced out to September, while a second rate hike is expected in February 2027. A BoE survey on Friday showed British businesses expect to increase prices less quickly in the year ahead than they did in April.

Bank of England Governor Andrew Bailey has 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. Political risks still pose as a potential downside risk for the pound despite having eased in recent weeks. Mid-June’s Makerfield by-election remains a potential catalyst that could renew discussions over fiscal policy and see Starmer’s leadership challenged.

JAPANESE YEN: The yen is up 0.22% to 159.89 yen per dollar. Intervention risk remains front of mind for traders after a warning from Finance Minister Katayama on Friday, who said Japan was ready to respond at any time and reserved the right to take “decisive action” against excessive volatility. Traders are likely not willing to challenge official buying from the Bank of Japan or Japanese Treasury, though not excited to take up bullish positions either. Still, despite the risk of intervention, traders have continued to build short yen positions in recent weeks. Without a meaningful shift in the policy outlook and economic growth, the yen is likely to maintain its 157-159 range. Money markets continue to expect a rate hike come June, pricing a 80% chance of a hike. The market sees a total of 43 bps of tightening by year-end. Intervention risk continues to offer the currency support near the 160 level. While a sharp rebound in the yen appears unlikely at the time being, the yen appears to be slightly undervalued given the Bank of Japan’s bias toward hiking rates and government intervention support.

AUSTRALIAN DOLLAR: The Aussie is 0.37% higher at $0.74071. Largely in Australia, demand is still outpacing supply, labor conditions remain tight, leaving inflation conditions pointed upwards. While the RBA has broadly signaled that it is in a wait-and-see mode following three rate hikes earlier this year, markets are still expecting one more rate hike by the end of the year. Trimmed mean measure inflation sits at an annual pace of 3.4%, which is likely to reinforce a tightening bias from the RBA. Markets have slashed tightening expectations in the near term, implying a 8% chance of a June hike to the 4.60% cash rate, while odds of a December hike are priced at 63%.

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, with a wave of buying coming after Iran announced it would cease strikes against Israel, providing traders optimism that the move could be seen a gesture to continue peace negotiations. May’s nonfarm payrolls data have likely provided the Fed with enough support to move with a rate hike without worrying over consequences to the labor market – if they choose to move higher on rates. Total nonfarm payrolls rose +172,000 in May, essentially in line with the upwardly revised April gain of +179,000. The unemployment rate held steady at 4.3%, unchanged from April and within the narrow 4.3%–4.5% range it has occupied since July 2025. The report included meaningful upward revisions: March was revised up +29,000 (from +185K to +214K) and April up +64,000 (from +115K to +179K), adding a combined +93,000 jobs to the prior two months. This is a significant catch-up and materially improves the picture of spring labor market momentum. Average hourly earnings for all private-sector employees rose +3.4% YoY, running in line with pre-war inflation. Still, money markets have not materially added to expectations of multiple rate hikes from the Fed. Odds of a December hike are priced at 68%, and markets are only seeing a max of 42bps of tightening over the next 12 months. 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.

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