Markets Still Optimistic for Resolution

MACRO FRAME

Markets look through the latest US–Iran hostilities and focus instead on today’s April jobs report, where a soft but orderly slowdown in hiring would likely support Fed easing expectations without triggering recession concerns. With Brent crude easing and the VIX holding near 17, markets are signaling caution rather than stress, though a materially weak labor print or renewed geopolitical escalation could quickly shift sentiment back toward risk reduction.

STOCK INDEX FUTURES

Equity index futures are higher, disregarding the exchange of hostilities between the US and Iran in a sign that April’s jobs report will be the dominant driver of price direction today. Consensus forecasts expect the economy to have added 65,000 jobs during the month, which would represent a notable slowdown in hiring compared to last month, though expect the unemployment rate to remain unchanged at 4.3%. A soft-but-not-disastrous outcome, say a sub-50K headline with the jobless rate ticking up to 4.4% rather than spiking, would likely be supportive for equities, since it reinforces the easing bias and pulls forward rate-cut pricing without triggering recession alarm.

Late afternoon Thursday, Iran launched a wave of attacks against US warships, triggering retaliatory strikes by the US. However, despite the attacks, the ceasefire remains in place and markets continue to signal that they expect a resolution to the conflict over the coming weeks, with July Brent Crude briefly falling below $100 a barrel. The VIX is trading at 17.11, up 0.03 points (+0.18%) from Thursday’s close of 17.08, essentially unchanged ahead of this morning’s April nonfarm payrolls release. A reading in the moderate 15–20 zone, holding steady with futures green, suggests neither complacency nor stress and argues against a near-term risk-off posture.

The June S&P is trading at 7,398.75, up 0.49% from Thursday’s settlement of 7,363.00, within an overnight range of 7,336.25 to 7,402.25. Near-term support is seen at 7,336.25 (overnight low), with initial resistance at 7,402.25 (overnight high) and the 7,500 round number above. The S&P 500 cash ($SPX) closed Thursday at 7,337.11, holding +6.20% above its 50-day SMA of 6,846.97 and well above its 200-day SMA of 6,749.33.

The June Nasdaq leads at 28,879.25, up 0.69% from Thursday’s settle of 28,682.25, within an overnight range of 28,541.00 to 28,897.00. Initial support is at 28,541.00 (overnight low), with resistance at 28,897.00 (overnight high) and the 29,000 round number just above. The Nasdaq 100 cash ($IUXX) closed Thursday at 28,563.95, sitting +12.77% above its 50-day SMA (25,435.08) and far above its 200-day SMA (24,925.96) — the most extended of the three indexes.

The June Dow is at 49,852, up 0.31% from Thursday’s settle of 49,700, within an overnight range of 49,582 to 49,874. Support sits at 49,582 (overnight low), with resistance at 49,874 (overnight high) and the 50,000 round number above. The DJIA cash ($DOWI) closed Thursday at 49,596.97, holding above its 50-day SMA of 47,873.29 and well above its 200-day SMA of 47,308.65.

Watch point: For Fed policy, a print near consensus (50K–80K) with 4.3% unemployment would validate the FOMC’s current hold at 3.50–3.75% while keeping the directional bias toward easing later in the year intact. A soft-but-not-disastrous outcome would also reinforce the easing bias. A materially weaker miss, by contrast, would shift the conversation from “insurance cuts” to growth scare.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.12% lower at 97.95 ahead of today’s jobs report. Any upside surprise to hiring is likely to be friendly to the dollar, though expectations of resolution to the US-Iran conflict are likely to keep the dollar on the backfoot so long as risk sentiment holds and oil prices remain near current level. A hiring print that underscores the weakening labor market is likely to contribute to downward pressure on the dollar and shift money market expectations of Fed easing.

Watch point: Dollar direction likely to hinge on whether labor data reinforces Fed easing expectations or pushes back against them. Continued optimism around a US–Iran resolution, stable oil prices, and firmer risk sentiment should keep the greenback on the defensive unless the payrolls data materially challenges the easing narrative.

EURO: The euro is 0.35% higher to $1.1766 as elevated risk sentiment continues to support the currency ahead of April’s labor report out later in the morning. Data out overnight showed ongoing industrial weakness in Germany, with output falling 0.7% m/m, well below expectations, driven by declines in energy and capital goods, while the three-month trend and annual pace both deteriorated further. At the same time, the trade surplus narrowed sharply to €14.3B as a surge in imports (+5.1% m/m) outpaced only modest export growth, pointing to softer external balance dynamics despite resilient intra-EU demand.

Developments regarding the US-Iran conflict will continue to be the dominant factor in price direction for the euro. While a complete agreement to end the war will be friendly to the euro, ebbing inflationary pressures will temper expectations of policy tightening from the European Central Bank, which could in turn cap the upside for the euro. Still, interest rate differentials for the ECB will provide support against the dollar. Markets are pricing a 80% chance of a hike at the June meeting. The fluid US-Iran peace agreement news is likely to contribute to volatility regarding rate-hike expectations. Markets are priced for two rate hikes by year-end from the ECB, with the first hike seen at the July meeting, a notable shift from earlier expectations of a hike come June.

Watch point: Language from ECB policymakers will be keenly watched for signals on whether a June hike is feasible given the geopolitical uncertainty. Given that the ECB is well-positioned in its current policy stance, a hold at June now appears to be the most reasonable course of action.

BRITISH POUND: Sterling is 0.45% higher to $1.3610, gaining solid support after Prime Minister Starmer said he would not resign damaging losses for his Labour party in local elections. Speculation had grown that a new Labour leader would increase fiscal stimulus and raise gilt issuance, which has notoriously pressured gilts and the sterling. Starmer’s decision to stay on board is leading to a relief rally.

Money markets are pricing a 40% chance of a hike from the Bank of England at its June meeting, a rise from Thursday’s 32% pricing but well below 55% priced at the start of the week. The drop in expectations reflect the weakness in the UK economy, which is expected to limit any tightening from the BoE.

JAPANESE YEN: The yen strengthened 0.11% overnight to 156.74 yen per dollar. Recent interventions from the Japanese government alongside repeated verbal warnings from officials are keeping the yen in a tighter range and limiting selling pressure against the currency. Japan’s top currency diplomate said the country faces no constraints on how often it can intervene in currency markets and is in daily contact with US authorities. The comments underscore that the 160 level is a pain threshold for the government, which is likely to act as solid support for the currency. US Treasury Secretary Bessent will be visiting Japan next week, lending focus to whether or not the US will join Japan in intervening. For the moment, official intervention is likely to be limited solely to Japan.

Minutes from the Bank of Japan’s most recent meeting showed that some policymakers pressed for an early rate hike at the March meeting. The minutes did move rate hike odds up slightly, with markets now pricing a 61% chance of a hike come June, compared to 55% odds before the release, though that could also be a reflection of the changing dynamic in Iran. For the Yen, fiscal policy support will be needed to achieve further price gains. Without firm policy support from the BoJ, the yen is likely to consolidate in the 157-159 range.

AUSTRALIAN DOLLAR: The Aussie is 0.30 % higher to $0.7232 as a broad increase in risk sentiment remains supportive of the currency. Australia’s 2026/27 budget is due next week and is expected to show a narrower budget deficit of around A$25 than earlier forecasts of A$37, driven by higher commodity prices and tax revenues. Any signals of potential fiscal tightening from the government could weigh on the currency by reducing pressure on demand and inflation, though several banks have opposing views over what action the government will take.

The Reserve Bank of Australia raised the cash rate to 4.35% and hinted that any further rate hike may be on hold saying, “monetary policy is well placed to respond to developments.” The board voted 8 to 1 for the hike, a hawkish shift from March when it split 5-4. Markets imply around a 18% chance of an additional move in June, but are fully priced for another hike to 4.60% by September. However, a reopening of the Strait this month would likely result in the board holding on rates. The main downside risk for the Aussie in the near term remains the geopolitical bid.

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 mildly lower across the curve in quiet pre-NFP consolidation, with all maturities within 2 bps of yesterday’s close ahead of the April jobs report: 3M 3.685% (-0.3 bp from 3.688%), 2Y 3.905% (-1.4 bps from 3.919%), 5Y 4.025% (-1.9 bps from 4.044%), 10Y 4.374% (-2.0 bps from 4.394%), and 30Y 4.952% (-1.7 bps from 4.969%). The 2/10 spread stands at 47 bps (-1 bp narrower from 48 bps), 5/30 at 93 bps (essentially flat), and 3M/10Y at 69 bps (-2 bps tighter but still uninverted). With the 10Y leading the rally by 2.0 bps versus the 2Y down 1.4 bps and the 30Y down only 1.7 bps, the move is a mild bull flattening of 2/10, consistent with positioning into NFP (March print +178k, U-rate 4.3%) where a soft headline would extend the bull steepening seen earlier in the week and a strong print would drive an flattening reversal at the front end.

Inflation compensation has stabilized but ticked back higher yesterday after Wednesday’s sharp roll-over, suggesting the de-anchoring concern is not fully resolved. 5Y breakeven 2.61% (+3 bps d/d from 2.58%, -8 bps w/w from 2.69% on 5/01), 10Y breakeven 2.45% (+3 bps d/d from 2.42%, -3 bps w/w from 2.48%), and 5y5y forward 2.29% (+3 bps d/d from 2.26%, +2 bps w/w from 2.27%) — the forward at a fresh local high. The 5Y/10Y BE spread of 16 bps still confirms a front-loaded inflation profile, but the bounce in the 5y5y forward is the more concerning signal: long-horizon inflation expectations are pressing higher despite the disinflationary geopolitical-relief narrative driving spot breakevens lower. With the 5y5y forward at 2.29% , still below the 2.50% de-anchoring threshold but at the cycle high, the Fed retains optionality to ease, but the margin is shrinking and a hot wage print today would test that anchor.

Watch point: Fed policy is poised to stand pat for the time-being, though a path to loosening remains open. Well-anchored inflation expectations should offer resistance to higher yields, while also supporting the case for Fed easing later in the year.

 

 

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