Markets Lower Ahead of Deadline

MACRO FRAME

Markets resume news flow trading, while inflation prints from Europe confirmed the conflict’s impact on energy prices. Meanwhile, March’s labor data supports the case for a Fed hold in the near-term.

STOCK INDEX FUTURES

US equity index futures are lower as investor anxiety over President Trump’s 48 hour deadline (ending 8 p.m. EST Tuesday) for Iran to reopen the Strait of Hormuz mounts. Overnight, the US and Israel conducted strikes on military targets on Kharg Island, Iran’s main export hub for oil. Meanwhile, Pakistani officials on Tuesday said efforts to facilitate talks between the two countries are still ongoing. Market sentiment continues to fluctuate between anticipating a relatively short end to the war and a prolonged conflict, stirring volatility and acting as the main driver of global financial markets.

ISM’s March PMI data for the services sector showed a slight decrease in economic activity for the sector, with the index falling to 54 from 56.1. Six of the 10 sub-indexes declined month-over-month, painting a picture of a sector still growing but absorbing the shocks of elevated energy costs and Middle East-driven supply chain disruption. Business activity eased, acting as the primary drag on the headline reading, while employment also fell. Still, the figure marked 21-consecutive months of expansion. The predominant theme across March ISM survey commentary was the Iran conflict and its expected transmission into higher prices.

This represents a shift from February, when tariff impacts were the dominant concern,  Iran-related impacts took over as the dominant commentary driver in March. JPMorgan Chase CEO Jamie Dimon’s shareholder letter echoed the same concern, warning of “potential for ongoing oil commodity prices along with reshaping global supply which may stick inflation and higher interest rates than markets currently expect.”

Watch point: Material signs of de-escalation will support equities, though the conflict presents real risks to future gains in the absence of certainty.

CURRENCY FUTURES

US DOLLAR: The USD  held at 99.98 as investor attention sits on President Trump’s deadline for Iran to reopen the Strait of Hormuz. Investor focus have been centered around price direction in oil as a proxy for developments in Iran. Given that Brent is trading above $110, markets appear to be pricing in little hope of a deescalation in hostilities.

Money markets continue to price no change in Fed policy throughout 2026. Friday’s nonfarm payrolls report for March was bullish for the dollar, though it has since given up its gains. February’s JOLTS data reinforced the narrative of a stable, but low-hiring labor market. The figures have likely taken a move up from the Fed entirely off the table, a factor that had previously been offering the dollar support. Dollar direction will remain subject to safe haven flows and price direction in oil.

Watch point: March’s NFP report and February’s JOLTS data confirms that a move up from the Fed is out of the picture and reinforced the narrative that the Fed is well positioned in its policy rate.

EURO: The euro is up 0.21% to $1.1567 as investors returned from the Easter holiday ahead of Tuesday night’s deadline to reopen the Strait. While price action remains driven by oil, risk sentiment, and broader macro news flow, the euro has found support from tighter monetary policy expectations as the dollar has come off local highs. Money markets are pricing a 61% probability of a rate hike at the European Central Bank’s meeting in April and are fully priced in for two additional hikes by year-end for a total of 75 bps of tightening.

While recent data revealed euro area inflation jumped to 2.5% YoY in March, core inflation fell to 2.3%, while a narrower measure that excludes food, energy, alcohol and tobacco held steady at 2.2%, unchanged from February. Services inflation, the stickiest and most policy-relevant component, actually eased to 3.2% from 3.4% in February. The critical risk factor is not the current inflation print but the persistence of the energy shock.

Watch point: March’s inflation data confirmed that headline inflation was dragged higher by rising energy prices, while other components were reassuring to the broader inflationary picture. A rate hike at the ECB’s April meeting appears unlikely, while the risk of prolonged conflict in Iran builds the case for a June hike.

BRITISH POUND: Sterling is 0.17% higher to $1.3252 as traders remain on edge ahead of tonight’s deadline. The economic calendar in the UK is relatively thin this week, lending focus to geopolitical events and moves in the dollar. On the central bank front, money markets are pricing 57 bps of tightening from the Bank of England by year-end. Markets had previously been pricing in over 75 bps of tightening two weeks ago, with the drop in tightening expectations largely reflecting economic weakness in the UK. PMI data for March, which was revised lower this morning, showed British business activity grew at the slowest pace in six months, while manufacturers’ input costs accelerated at the fastest rate since 1992. The conflict in Iran has taken UK politics out of the spotlight, though local elections in early May create further risk of volatility. Keir Starmer’s governing Labour Party is trailing the populist Reform UK and the left-wing Green Party.

Watch point: Signs of de-escalation between the US and Iran are likely to provide short-term support to GBP, but evidence of an increase in inflation presents a downside to growth and will put the BoE in a bind.

JAPANESE YEN: The yen is little changed at 159.79 as investor sentiment centers around developments in Iran. Traders also continue to watch for indications of Tokyo intervening in the currency market following strong warnings from several officials in recent days. Japanese Finance Minister Satsuki Katayama on Friday said the government stands ready to act against speculative moves in FX markets as volatility has risen “significantly.” Speculators have also been adding to their short yen positioning, with the latest weekly data showing a short position worth $5.7 billion, the highest since July 2024, when Japan last intervened in the FX markets. Money markets are pricing a 43% chance of a hike from the Bank of Japan at its April meeting and are fully priced for a hike come July.

Watch point: An April rate hike could pull USD/JPY closer to 155, though the odds of such happening appear unlikely at the time being.

AUSTRALIAN DOLLAR: The Aussie is up 0.33% $0.6941 in a thin week on the economic calendar, lending attention to developments in Iran. Data out Tuesday showed household spending rose a modest 0.3% for a second month in February. Nominal spending will likely be stronger in March but only because of a jump in petrol prices, suggesting a subdued quarter for real consumption. Markets imply around a 65% chance the RBA will hike rates again at its next meeting on May 5, a drop from 75% odds on Monday. Still, markets expect the cash rate to land at 4.7% by year-end. Analysts at HSBC now expect Australia’s economy to contract in the second quarter after two rate hikes this year, and higher fuel prices to weaken consumer spending. Major support for the Aussie lies at the 10-week low of $0.6834.

TREASURY FUTURES

Yields are little changed across the curve as markets await tonight’s deadline for Iran. Monday’s ISM services data showed the prices gauge rose to 7.7 points to 70.7 in March, the highest reading since October 2022. Survey respondents noted that higher energy costs are flowing through into airline operations, freight logistics, and energy-intensive service inputs. Construction-related inputs, including lumber, copper, and steel, were also cited as rising in price, compounding the cost environment for services firms. The energy shock is the dominant mechanism. Average US gasoline prices rose approximately 38% since US and Israeli airstrikes on Iran commenced, and retail diesel costs have materially impacted airline operating margins and trucking/logistics networks. These price pressures are likely to find their way into the broader economy if the conflict continues to persist, though March’s inflation print is likely to show inflation limited to just the energy components.

Friday’s payrolls report did little to move Fed policy expectations, with markets pricing in no change to the Fed Feds rate by year-end. However, we look for the Fed to lower rates once by year-end, with a reduction most likely in September. One-year inflation swaps remain elevated ahead of March’s inflation data, which is likely to show a sharp, energy-induced spike in prices. Swaps are currently priced just under 3.2%, where they have been hovering for around the last week. Treasury’s are likely to continue to trade at the mercy of energy prices and news headlines ahead of March’s inflation data.

Watch point: Following March’s labor data, an immediate case for a change in Fed policy remains unlikely. March’s CPI data is expected to show a rise in prices, though evidence of sustained inflation will be closely monitored for impacts on policy expectations.

The spread between the two- and 10-year yields is 48.70 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.848%.

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