March Core Inflation Little Changed

MACRO FRAME

March CPI delivers the energy shock, though the core reading provides a reassuring signal that broader inflationary pressures have not dramatically increased. The ceasefire framing has shifted from relief to skepticism. Meanwhile, March’s labor data supports the case for a Fed hold in the near-term.

STOCK INDEX FUTURES

US equity index futures are higher, getting a lift from March’s inflation data. The CPI print came in hot, driven overwhelmingly by a historic surge in energy prices. Headline CPI rose 0.9% MoM on a seasonally adjusted basis, triple the 0.3% pace in February, lifting the YoY rate to 3.3%, up sharply from 2.4% in February. The energy index alone accounted for nearly three-quarters of the all-items increase. Core inflation remained contained at +0.2% MoM and +2.6% YoY, confirming the headline surge was an energy-driven event rather than broad-based price pressure, a positive for equities heading into today’s ceasefire talks. Positive developments from talks in Islamabad, particularly in regard to the reopening of the Strait, would provide a tailwind for equities and shift focus back to the path for Fed easing. However, oil flows through the Strait of Hormuz remain effectively halted, while rising tensions over Israeli strikes in Lebanon risk undermining Iranian cooperation in negotiations, creating downside risks for equities prices.

Watch point: While the de-escalation supports equities, the conflict still presents real risks to future gains as US troops continue to move to the region.

CURRENCY FUTURES

US DOLLAR: The USD index slipped 0.12% to 98.69 following March’s inflation print. Focus now shifts to peace talks between the US and Iran in Islamabad today. Developments in the Middle East continue to have an outsized impact on price direction in currency markets. Constructive developments in negotiations would likely weigh on the dollar, while a deterioration in talks, particularly if disruptions to shipping persist, could quickly reverse sentiment.

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 largely 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 up 0.13% to $1.1716. Developments regarding the ceasefire between the US and Iran remain the dominant factor in price direction for the euro. The ceasefire has dramatically shifted expectations for near-term tightening, with odds of an April hike priced at 32%, sharply below Tuesday’s 61% probability of a rate hike. Meanwhile, markets have priced out the possibility of a third hike by year-end, with 59 bps of total tightening expected vs. Tuesday’s 75 bps. 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.

BRITISH POUND: Sterling is 0.16% higher to $1.3458, as focus centers around talks in Pakistan and a potential reopening for the Strait. Markets are now pricing just 39 bps of tightening by year-end. The sharp drawdown in tightening expectations is reflective of the weakness in the UK economy. Economic growth remains stagnant, slow business activity growth, and falling wage growth alongside a weak employment picture in the country remain favorable for policy easing by year-end rather than tightening. 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.

Watch point: The de-escalation between the US and Iran provides short-term support to GBP, but pre-war macroeconomic factors present a hurdle for BoE policy tightening. We look for GBP/USD to weaken over 1H 2026.

JAPANESE YEN: The yen is little changed at 159.14 yen per dollar. JGB yields pushed to multi-decade highs this week, with the 10-year approaching 2.43% and the 5-year touching a record 1.84%, as domestic bond markets reprice for a prolonged inflationary environment tied to the Iran conflict, lending further importance to today’s talks regarding pricing inflation. Swap markets now assign a 58% probability of a BoJ rate hike in April. While rising yields are nominally supportive of JPY via narrowing rate differentials, 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 little changed at $0.7080. Developments regarding talks in Pakistan are set to be the driver of price action for the risk-linked currency, though rising inflationary pressures and expectations of tightening from the Reserve Bank of Australia offer underlying support for the currency. Markets imply a 64% chance of another quarter-point rise in May, though that was down from near 70% last week, and see rates at 4.64% 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.

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 across the curve, with prices little changed in response to this morning’s data, which if not for the sticky inflationary print, would otherwise be friendly to prices.

The spread between one- and two-year inflation swaps has widened to 32.3, reflecting sentiment that the impact of higher energy prices will be transitory, much like the impact of tariffs on prices. Swaps have fallen substantially in response to the ceasefire despite the fact that tanker traffic through the Strait is still lackluster. As of April 8, AIS data confirmed no surge in transits despite the ceasefire announcement, as shipowners await clarity on security arrangements, insurance cover, and potential Iranian transit fees that could implicate US sanctions. Beyond the physical market, financial measures of longer-run inflation show little alarm. The latest New York Fed survey revealed that consumer expectations for inflation three years from now edged up only a modest 0.1% last month, while the five-year/five-year breakeven rate remains below 2.2%, broadly consistent with the Fed’s longer-run PCE target. With 2-year swaps holding near 2.5–2.75% and longer-run inflation expectations remaining well-anchored, the Fed has room to treat any near-term CPI acceleration as transitory without adjusting its current policy and leaving the path for rate cuts later in the year open.

Watch point: Following March’s labor data, an immediate case for a change in Fed policy remains unlikely. March’s CPI data is expected to show a rise in prices, though evidence of sustained inflation will be closely monitored for impacts on policy expectations.

The spread between the two- and 10-year yields is 50.80 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.73%.

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