Markets Look to Hormuz Opening Prospects

MACRO FRAME

Renewed geopolitical tensions add another layer of uncertainty to global markets, while February’s nonfarm payrolls report keeps the case for a summer Fed rate cut intact but offers limited clarity on the extent of easing.

STOCK INDEX FUTURES

Equity indexes turned higher ahead of the bell as oil prices eased from session highs. Treasury Secretary Scott Bessent said the US is allowing Iran to continue shipping crude via Hormuz, while President Trump is looking to build a maritime coalition to safeguard commercial activity in the Strait. Several US allies have denied President Trump’s requests to escort vessels through the waterway.

Meanwhile, the Fed begins its two-day meeting, with comments from Chair Powell to follow on Wednesday. Expectations for near-term rate cuts have eased, and markets are pricing in 99% odds of rates remaining at current levels. On the corporate front, investors are parsing the information out of Nvidia’s GTC event. CEO Jensen Huang announced a slew of deals and said the company sees $1 trillion in chip sales through the end of 2027.

Watch point: Further escalation in the Middle East or a sustained move in oil above $90 could deepen the current risk-off tone across equities

CURRENCY FUTURES

US DOLLAR: The USD Index is little changed at 99.730 ahead of a raft of central bank meetings throughout the week, with focus centered around potential responses to the conflict in the Middle East. The Fed will announce its policy decision on Wednesday, with the European Central Bank, the Bank of England and the Bank of Japan following a day later. The banks are all expected to keep rates steady as market pricing for rate cuts have shifted hawkishly for most central banks as elevated energy prices present upside risks to inflation. For the Fed, money markets are seeing just one cut this year. While recent data supports the case for Fed easing later in the year, though the recent surge in oil prices has complicated the outlook for policy.

Near-term price action is likely to remain headline-driven; any signs of de-escalation could weigh on the dollar as safe-haven demand fades, while continued fighting and tighter energy markets would likely reinforce dollar strength through higher inflation expectations.

Watch point: Dollar direction is likely to remain driven by geopolitical headlines and energy markets in the near term.

EURO: The euro is little changed at $1.1513. Money markets are favorable to a rate hike from the European Central Bank by July, as the fallout from the conflict in Iran has shifted monetary expectations hawkish. Meanwhile, the conflict and associated rise in energy prices has dented investor morale. Data overnight showed the ZEW Indicator of Economic Sentiment for the Euro Area fell sharply by 47.9 points from the previous month to -8.5 in March, the lowest in 11 months and significantly below market expectations of 24. The indicator for inflation expectations surged 78.9 points to a reading of 79. Germany’s sentiment reading also fell, with its index falling by 58.8 points to -0.5 in March, down from 58.3 in February and far below market expectations of 39. The impact of higher energy prices raises upside risks to price pressures and also raises concerns that Germany’s economic recovery could be halted. The ultimate impact will depend on the duration of the conflict, while most analysts are doubtful that a quick resolution is likely.

Watch point: Euro direction will likely remain sensitive to global risk sentiment and dollar dynamics.

BRITISH POUND: Sterling little changed at $1.3327, as markets focus on the conflict in Iran ahead of the Bank of England’s policy decision later in the week. Focus at this week’s meeting will center around any signals about how policymakers would react to a potential new oil shock as recent data has painted a stagnant picture of the UK economy. Market pricing for BoE policy suggests that the rise in energy prices has put an end to the banks easing cycle.

UK jobs data later this week could help to shape expectations for the longer-term outlook for BoE policy. Employment is softening and wage growth, which has proven particularly resilient, has also started to show signs of abating. GDP growth stagnated in January, missing forecasts for 0.2% growth. The services sector recorded no growth, despite recent upbeat PMI readings. Industrial production declined by 0.1%, while manufacturing production rose 0.1%, both missing forecasts.

Watch point: Policy decisions from the Bank of England are now on hold with renewed geopolitical risks and a potential sustained rise in energy prices.

JAPANESE YEN: The yen is little changed at 159.00, nearing levels of previous intervention from government authorities. The currency has fallen more than 2% against the dollar since the outbreak of the conflict in Iran. Finance Minister Satsuki Katayama said the government is monitoring currency movements closely and is prepared to act with strong measures if needed.

Bank of Japan Governor Kazuo Ueda said underlying inflation was accelerating towards the bank’s 2% target, stressing that price rises must be matched by solid wage gains. The Bank of Japan is expected to keep its policy rate steady on Thursday, while market focus will be on how the bank could respond to changes in energy prices.

Watch point: A move beyond the ¥160 range would likely intensify intervention rhetoric, while sustained energy-driven inflation could keep tightening expectations intact despite political pressure.

AUSTRALIAN DOLLAR: The Aussie gained 0.33% to $0.7093 following the Reserve Bank of Australia’s move to hike rates by 25  bps, while the bank warned of “material” risks to inflation. Middle East conflict aside, domestic data alone has proven inflationary enough to justify the case for monetary tightening, while the rise in energy prices supports the case for further tightening. The bank voted 5-4 in favor of the hike, though Governor Michelle Bullock stressed that the split was more of a difference in timing than direction and that further tightening is necessary. Inflation risks in the country remain firmly skewed to the upside, as a result of excess demand and higher energy prices. The RBA’s latest February forecasts already penciled in headline inflation reaching 4.2% by mid-year before the war unleashed a fresh global oil shock.

Markets currently imply an additional 43 bps of total tightening by year-end, pricing in a second rate hike by August.

Watch point: Wage figures, capacity utilization, PMI readings, and other signals on economic momentum will dictate market sentiment over future timing expectations.

TREASURY FUTURES

Treasury yields are lower across the curve, with the 10-year note trading at 4.206% ahead of the Fed’s policy decision on Wednesday. Expectations are that the central bank will leave rates on hold. However, the key question for markets will be what signals the bank sends on the prospects for further easing this year. Labor supply vs. demand dynamics will likely be a key top for policymakers when discussing the prospects for future easing given February’s weak hiring report. However, given the rise in energy prices, the balance of risks between inflation and the labor market is likely to deepen the divide between policymakers on how to approach interest.

Money market expectations for Fed policy have shifted hawkishly following the beginning of the conflict in Iran, with market-implied odds only expecting one rate cut by December. Markets had previously been expecting two 25 bps reductions in policy this year.

Fed Chair Powell is expected to highlight two-sided risks to the economy, stemming from the conflict. His statement, however, is not expected to offer a clear signal about the implications on monetary policy. The Fed will also release updated projections for the economy and its “dot-plot” forecasts for interest rates. Oil will likely continue to be the main driver for sentiment and yields, with the risk of a prolonged conflict likely to further shape Fed policy toward a halt in policy for the remainder of the year.

Watch point: A weak headline NFP figure supports the case for Fed easing this year, but questions as to how slow labor demand is cooling will likely determine further policy at the Fed, while a prolonged conflict in Iran is likely to limit the amount of easing in policy.

The spread between the two- and 10-year yields is 53.70 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.665%.

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