US-Iran Talks Back On?

MACRO FRAME

Markets move into earnings season with a fresh batch of earnings that have surprised to the upside for the most part, while global equity markets continue to trade opposite of oil prices. Markets will also continue to watch for signs of renewed diplomatic efforts between the US and Iran.

STOCK INDEX FUTURES

US Equity index futures moved slightly higher overnight as Bloomberg reports Washington and Tehran are discussing another round of in-person negotiations before the ceasefire expires April 21. VP Vance said Monday the future of talks “rests with Tehran.” No date or location has been confirmed, but sources say the objective is to extend the ceasefire. Iran’s demands remain sanctions relief first; the US demands uranium stockpile surrender, nuclear dismantlement, and Hormuz reopening.

On the corporate front, JPMorgan’s Q1 beat reinforces the earnings backdrop underpinning the S&P 500’s limited recovery to start the week. Record markets revenue of $11.6B and a 28% surge in IB fees confirm that war-driven volatility is flowing directly into financials’ bottom lines. Jamie Dimon noted that the US economy remained resilient in the quarter, with consumers still earning and spending and businesses still healthy, while increased fiscal stimulus, deregulation benefits, AI-driven capex, Fed asset purchases also helped the banking sector. However, Dimon noted “an increasingly complex set of risks — such as geopolitical tensions and wars, energy price volatility, trade uncertainty, large global fiscal deficits and elevated asset prices.” Elsewhere, BlackRock delivered one of its strongest quarters in history, Wells Fargo was the soft spot of the group, missing on both lines, while Citigroup reported that first-quarter profit rose 42% from a year ago.

Global equity markets remain highly sensitive to movements in oil prices, as evidenced by the broad-based correlation between the MSCI All-World Index and Brent crude throughout late February into mid-April.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.36% lower at 98.01 following a drop in oil prices overnight. This morning’s PPI data had little effect on the dollar, suggest that developments in the Middle East continue to be the dominant driver in price direction in currency markets. The conflict has evidenced that the dollar remains a preferred safe haven asset for investors, a theme that is likely to continue as hostilities between the two warring countries continues, but also risks a reversal if diplomatic channels open.

While safe haven demand is likely to prop up the dollar in the face of the conflict, underlying fundamentals make the case for a resumption of the dollar’s downward trend once hostilities in the Middle East are officially over. Despite rising inflationary pressures driven by energy prices, the dollar has lost its interest rate differential support it once drew from hawkish Fed expectations, support that has since been repriced away. With the labor market softening materially, the underlying case for a Fed rate cut later in the year remains intact.

Watch point: Despite March’s hot inflation print and a sticky February PCE reading, a move up from the Fed is out of the picture as the Fed is well positioned in its policy rate for the time being, though a weak labor market leaves the door open for easing.

EURO: The euro is 0.40% higher to $1.1807 as risk sentiment returns to markets following the Bloomberg report overnight. Developments regarding the ceasefire between the US and Iran remain the dominant factor in price direction for the euro. Markets are now pricing a 35% chance of an April rate hike, a steep move down from Monday’s 51%. The risk of a prolonged rise in energy prices makes a more appeal case for a hike at the June meeting. The path to tightening from the ECB will hinge on the effectiveness of the two-week ceasefire and whether it brings lasting peace. The critical risk factor is 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 is unlikely, while the case for tightening depends on the effectiveness of the ceasefire and duration of the rise in energy prices.

BRITISH POUND: Sterling is 0.57% higher to $1.3583. Price direction in FX markets continues to be dominated by developments from the US-Iran conflict. Price direction in the pound remains subject to geopolitical developments out of the Middle East, given Britain’s dependence on energy imports and the economy’s sensitivity to higher energy costs. Since the overnight headlines regarding the US and Iran, market expectations for Bank of England tightening have fall since market close on Monday; markets are now pricing 40 bps of tightening by year-end, down from 51 bps on Monday.

The weakness of the UK economy remains a limiting factor for potential tightening and market-implied odds appear to be overshooting realistic BoE policy. BoE Governor Andrew Bailey said earlier this month markets were getting ahead of themselves by betting on rate rises. Money markets had previously been pricing in two rate cuts this year before the outbreak in hostilities as economic growth remains stagnant, business activity growth is slow, while falling wage growth and a weak employment picture in the country remain favorable for policy easing by year-end rather than tightening. However, the case for policy easing out of the BoE remains subject to the effectiveness of the ceasefire and if oil prices can drop closer to pre-war levels, given that inflation in the UK remains among the highest in the G7. If those dynamics fail to materialize, the case for policy easing may be out of the picture.

Watch point: The escalation between the US and Iran continues to drag on the GBP, while pre-war macroeconomic factors present a hurdle for BoE policy tightening.

JAPANESE YEN: The yen advanced 0.45% against the dollar to 158.73 yen per dollar, following broader moves in the currency market. The yen remains vulnerable to selling pressure on concerns that the nation’s trade balance will deteriorate and the rising risk that crude oil prices stay elevated. The chance of a rate hike this month by the Bank of Japan, has receded as the war keeps markets volatile and muddies the economic outlook.

Bank of Japan Governor Kazuo Ueda said on Monday that economic and price developments were moving roughly in line with the bank’s forecasts, but called for vigilance over the impact of the conflict in the Middle East. Swap markets now assign a 32% probability of a BoJ rate hike in April. The yen’s near-term trajectory remains hostage to geopolitical developments, a durable ceasefire could quickly unwind oil-driven inflation expectations and reduce urgency for BoJ action, though the bank is set to maintain its tightening bias.

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 0.60% higher to $0.7137 as risk sentiment returns overnight following the Bloomberg headline. Local surveys showed Australia’s business and consumer confidence crashed as the economic outlook darkened due to fallout from the Iran war. The index of business confidence fell 29 points to -29 in March, the second largest monthly fall in history, with the scale only seen in 2008 during the global financial crisis or in 2020 with the onset of the COVID pandemic. Business activity, however, held steady at a still healthy +6. The surveys also revealed that higher energy costs were feeding through transport, utility and construction industries. However, retail price growth fell to 0.5%, suggesting businesses may be struggling to pass through the higher costs to consumers.

Rising inflationary pressures and expectations of tightening from the Reserve Bank of Australia offer underlying support for the currency. Markets imply a 67% chance of another quarter-point rise in May, and see rates at 4.70% by year-end. While a durable ceasefire 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.

Australia will publish its monthly jobs data for March on Thursday where any labor market disruptions from the ongoing Middle East conflict will be closely monitored.

Watch point: The RBA is likely to maintain its tightening bias amid persistent inflationary pressures. However, weaker growth prospects raise risks to gains in the currency.

TREASURY FUTURES

Yields are little changed in response to the overnight Bloomberg report and this morning’s PPI data, suggesting that the bond market could be dealing with headline fatigue. Headline PPI rose 0.5% in March, matching February’s pace and landing just below January’s 0.6% print. On a 12-month basis, final demand prices are up 4.0% year-over-year (unadjusted) — the largest annual advance since February 2023’s 4.7% reading. The headline is unambiguously energy-driven; strip that out and the picture is considerably more benign.

Longer-run inflation expectations at the time-being offer resistance to higher yields as the Fed should remain biased towards policy-easing given weakness in the labor market. However, the rise in energy prices does complicate the case for policy-easing if a durable ceasefire and end t- hostilities cannot be agreed to.

The 1/2-year inflation swap spread remains above 30 bps, in line with expectations that markets are expecting the impact of higher energy prices to be short-lived. Meanwhile, the NY Fed’s March 2026 Survey of Consumer Expectations showed 3-year inflation expectations rising only a modest 0.1 ppt despite the largest monthly gasoline spike on record. With 2-year swaps anchored near 2.5–2.75% and no evidence of de-anchoring in longer-horizon measures, markets are not pricing a scenario that requires a policy response from the Fed. We maintain our outlook for one Fed rate cut in 2026.

Watch point: Following March’s labor and inflation data, an immediate case for a change in Fed policy remains unlikely, while a path to loosening remains open.

The spread between the two- and 10-year yields is 51.80 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.805%.

 

 

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