Trump says Iran war "close to over" amid hopes for more negotiations
Markets are still positioned for a short-lived inflation spike, which, especially in the US, helps support a more dovish positioning. A cooling US jobs market also mitigates the potential of second-order effects. In EUR rates, we still see a 50% probability of an April cut, but much will hinge on whether Trump can find a resolution soon, as claimed
Mixed Messages and Mixed Market Moves
Risk sentiment has been stabilising as equities recover and bond spreads ease. Amid the mixed messaging, there were already signs that US President Trump was looking for a way out; markets pounced on headlines that the Iranian president was willing to end the conflict, albeit sticking to Iran’s demands.
But already ahead of the news, it appears markets were drawing comfort from Fed Chair Powell’s comments earlier this week. 2-year UST yields have come down more than 20bp from their peak last Friday, though over the past session the belly of the curve has taken more of a lead.
Powell might also draw some reassurance from the markets’ inflation expectations, allowing him to look through the price spike. While short-dated inflation swaps remain at elevated levels, pointing to price increases above 3% in the near term, forward inflation points to only a short-lived spike, and indeed, longer expectations such as the 5y5y forward have even seen a gradual decline since the beginning of the conflict, signalling at least some pondering on longer-term growth concerns.
Some recent job indicators, such as the JOLTs data, also point to diminishing potential for second-round effects with the jobs market cooling, although the market will want to wait for the payrolls’ data later this week.
In EUR rates space, the read-through from inflation forwards has also remained rather benign, but admittedly not as clearly pointing lower as in the case of the US. The flash CPI reading on Tuesday was not as high as expected, but it is clearly too early to draw firm conclusions.
Markets still attach a more than 50% chance of a rate hike at the upcoming April meeting, and also a high probability that the ECB will end up hiking three times by the end of the year. At least pricing has not become more pronounced despite some of the latest ECB commentary coming in on the hawkish side. It was longer rates that have taken the lead lower of late and the decline in longer real rates might point to markets being more ready to look through the price spike and more at the broader economic consequence of the conflict.
Wednesday’s Events and Market View
Following headlines about messages exchanged between the warring parties, markets will want to see whether this leads to a path toward de-escalation. The question that remains is how quickly energy flow can be fully restored, given the destruction already incurred.
The eurozone will release the final manufacturing PMI for March, and the ECB’s Cipollone is the only official scheduled to speak today. More focus will be on the US, where we will get the ADP employment figures and the manufacturing ISM for March, as well as retail sales for February. Speaking from the Fed are Musalem and Barr.
In primary markets, Germany will auction €4bn in 7-year Bunds.
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