Markets Await Strait News and Labor Data

MACRO FRAME

With another hold on policy, markets look to jobs data in the US and Fed speak, while the US-Iran backdrop continues to offer uncertainty.

STOCK INDEX FUTURES

Equity index futures overnight were mixed overnight, with the Dow and S&P holding stable, while memory stocks dragged on the Nasdaq. Western Digital is down around 15–16% and SanDisk about 10% pre‑market, even though both guided quarterly revenue above consensus on strong AI‑driven demand. Both names have surged roughly 200% and 400% YTD, and in a now very crowded trade investors are looking for perfect growth and margins, so guidance that was anything but spectacular is triggering a sharp selloff across the AI‑memory complex. Still, strong results from key tech/AI leaders this season have reassured markets that large AI investments are being monetized, just some earlier than others, helping the S&P 500 and Dow hit fresh records earlier this week. The Nasdaq is now about 3% below its all‑time high, having bounced off levels that were close to entering a correction last week.

On the geopolitical front, Brent trades in a tight range near $80bbl as markets await further details on a possible US-Iran deal to reopen the Strait. The Fed remains focused on the energy outlook; most officials say they are ready to act if higher energy costs start feeding more broadly into inflation- rhetoric that is commonly repeated among officials. St. Louis Fed President Musalem speaks later today, potentially offering more insight on policymakers’ views. Chair Warsh continues to offer little forward guidance; traders are pricing the September decision closer to coin‑flip odds for a hike at roughly 59%.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index is little changed at 99.75, maintaining a tight range in early morning trade as traders await news of a possible US-Iran deal and tomorrow’s labor report. Forecasts are expecting payrolls to rise by around 80,000. A Strong print would reinforce dollar strength and see Fed tightening expectations move forward, mainly benefiting it against the EUR, JPY, and GBP. On Wednesday, Fed Governor Lisa Cook made comments that she was open to raising short-term rates, while San Francisco Fed President Daly reiterated her support for the bank to hold on rates. Traders have reduced expectations of a Fed hike at September’s meeting from about 70% at the start of the week to under 60% this morning in the wake of US-Iran news. However, the market remains fully priced for a hike in December. The dollar has lost some support in the form of policy-rate expectations, which have been a dominant driver of dollar direction in recent months. DXY remains particularly vulnerable to the divergence in policy expectations between Fed and ECB.

Watch point: While July’s meeting was taken as dovish, the geopolitical backdrop reinforces an inflationary theme among global economies leading policy expectations to be a dominant driver in currency direction.

EURO: The euro slipped 0.10% to $1.1539, remaining near a seven-week high. Despites news of a potential US-Iran deal, energy prices remain elevated in Europe, crude futures are around 10% higher than pre-war levels, while European spot crude prices are about 18% and 25% above those levels. That dynamic is likely to keep bond yields and tightening expectations elevated, unless a credible flow of tanker traffic through the Strait is maintained. Tomorrow’s labor report in the US has bearish potential for the EUR in the event of a hot reading, which would add to Fed tightening expectations and widen to expected year-end policy rate spread between the Fed and ECB. Money market are pricing a 73% chance of a hike in September, though are no longer fully priced in for a move higher in October. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction. In the event of a peace deal between the US and Iran, the market will likely continue to price in risk premium, keeping European bond yields and policy tightening expectations elevated compared to pre-war levels.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations.

BRITISH POUND: Sterling is little changed at $1.3468. A relatively light calendar week in the UK will lend focus to US-Iran developments and any developments in the new administration on Downing street. Traders continue to await further US-Iran news and Friday’s US labor report for clues on Fed policy. The Bank of England kept interest rates on hold last week, saying it needed more time to assess how much inflation may rise as a result of the closure of the Strat. Investors are pricing in 23bps of tightening by year-end, with a hike not fully priced until the February 2027 meeting. The Times reports Treasury officials are exploring raising billions of pounds in extra borrowing by using the flexibility created by the revised fiscal rules. Markets have taken this calmly so far, the current framework allows for more borrowing strictly for investment without breaching headline rules. Largely, the market appears to be digesting this as a shift toward growth‑friendly public investment rather than fiscal loosening. Money markets are no longer pricing in a rate hike by year-end.

JAPANESE YEN: The yen weakened modestly to 157.90 yen per dollar. Focus is on the US labor report tomorrow. For the yen, a shift in fundamentals is needed to fully reverse the weakening trend. However, that may prove unlikely given the country’s large debt overhang and Taikichi’s expansive fiscal policies, including her favoring a weaker yen. Bank of Japan policymakers debated mounting price pressures at their meeting in June and the need for higher policy rates according to June’s meeting minutes. A few board members expect inflation to rise in the latter half of the current fiscal year as firms plan price hikes. Mainly, the debates highlight a growing focus on inflation inside the board, while most members said the pass-through from higher oil prices had moved at a relatively fast pace for business-to-business transactions, which could spread to consumer prices. The minutes have lifted expectations of a September rate hike from 36% to 48%. For the yen to buck its weakening trend, stronger policy support will be needed from the bank, among other factors.

Watch point: With the recent intervention in the currency, the yen will need strong monetary policy support from the Bank of Japan to prevent further depreciation.

AUSTRALIAN DOLLAR: The Aussie fell 0.30% $0.70.34. An increase in risk-sentiment across the globe and strong consumer spending data in Australia has lifted the Aussie above the $0.70 level in recent days despite market expectations of a year-end rate hike remaining dull. Household spending rose 0.8% in June, driven by electric vehicle sales, per the Australian Bureau of Statistics. Spending for Q2 slowed a tick to 0.7% in real terms. While the data does support the Reserve Bank of Australia’s hawkish stance, Q3 inflation figures will serve an outsized role in determining whether or not the bank raises rates. Second-quarter inflation in Australia came in below forecasts, the downside surprise relative to expectations has shifted the policy bias towards a RBA hold for the remainder of the year. Markets are now see just a 2% chance of a hike next month, 11% in September, and are pricing the chance of year-end hike just under 42%.

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 be in focus in upcoming data.

TREASURY FUTURES

Yields edged higher across the curve in a flattening dynamic. In Fed speak recently, Governor Cook said she was ready to raise rates if inflation does not start easing, and Daly voiced her support of the decision last week to hold rates steady. Yields dropped on Wednesday as oil prices dipped on hopes the Strait would reopen ahead of Friday’s labor report. President Trump has characterized the talks with Iran positively while also threatening to hit Iran military action if a deal is not reached, highlighting the uncertainty of the situation, a factor that is likely to keep rates elevated. Data released ahead of Friday’s report has been in favor of the hawk’s camp: ADP private employment report showed an increase of 44,000 jobs in July, and while 25,000 jobs shy of expectations, wages rose 4.4% from a year ago. ISM services PMI data showed the sector maintained a strong pace of growth in July, while strong demand competes with supply constraints, driving up input costs for businesses. Oil prices have retreated over the last several days, which has been and is likely to be a dominant driver in yield direction. A deal with Iran to reopen the Strait could come today a move that would likely result in oil prices extending their decline and weigh on Fed tightening expectations, a move that would likely flatten the curve.

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term.

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