News-Focused Week

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 moved higher overnight, with the Dow leading gains as risk sentiment was supported by cautious hopes of a deescalation in fighting between the US and Iran. Brent crude is down around 5%; President Trump said talks with Iran would take place on Monday after he called off strikes on Iran over the weekend in an effort to pursue a deal to reopen the Strait. Geopolitics aside, the earnings front remains fundamental, with over half of S&P 500 companies having reported earnings, roughly 86% of those have beaten earnings expectations. Across the globe, however, Japan’s Nikkei closed about 1% lower, while South Korea’s KOSPI slid 5% as similar concerns over AI infrastructure spending and revenue returns weigh on the indexes. Strong earnings from Amazon and Microsoft last week helped ease some of those concerns by showing clearer revenue and profit linkage to cloud/AI investments. Investors are now focused on whether other major names can show similar evidence this week.

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 0.16% lower, following a drop in oil prices overnight and as safe haven demand modestly retreated amid the deescalation in US-Iran hostilities. The market has reconsidered its post-FOMC rate hike doubts modestly, with Fed-tightening expectations rebounding as September’s meeting is now priced at a 63% chance of a hike compared to 30% odds following Warsh’s press conference. Regardless, the dollar has lost some support in interest-rate differentials, 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.

EURO: The euro is little changed at $1.1529. Japan confirmed on Monday it had carried out yen-buying intervention on Friday with the US Treasury department, although rather than buying yen and selling dollars, the Financial Times reported the US instead sold euros for yen. Eurozone inflation figures for July largely matched expectations, though core CPI rose 2.5% YoY, above the 2.4% YoY expected pace. Headline inflation rose to 2.9% YoY, mainly thanks to higher energy prices, though underlying price pressures remain firm with services prices rising alongside non-energy industrial goods. Stronger-than-expected economic data in recent days has reinforced market expectations that the European Central Bank will raise rates once more this year. Money markets have moved expectations of tightening modestly forwards and are pricing a near 73% chance of a hike in September, while remaining 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. The drop in Fed tightening expectations has narrowed the spread between ECB and Fed, proving favorable to EUR. With no improvement in tanker flows through the Strait, and even 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.

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

BRITISH POUND: Sterling is 0.12% lower to $1.3432. The new government’s cautious fiscal stance has ease some investor concerns, which has supported the currency in recent weeks despite the dovish message from the Bank of England at their latest policy meeting. Deputy Governor Clare Lombardelli, said on Thursday that her decision to keep rates on hold had not been a hard one. The Bank of England is now in a waiting period to assess the extent to which inflation will rise as a result of the US-Iran war and renewed rise in energy prices. Governor Bailey noted that holding the Bank Rate steady was appropriate given uncertain global conditions, while domestic conditions have turned more benign. Largely, the BoE is not seeing enough on the data front to abandon its wait-and-see approach. Money markets have pushed back the timing of a fully priced rate-hike to December in response.

JAPANESE YEN: The yen is 0.45% firmer at 156.88 yen per dollar. Japan and the US conducted coordinated yen‑buying intervention to halt the yen’s slide to fresh 40‑year lows, and both governments say they will not hesitate to act again. This is the first joint yen intervention since 2011. Central bank data suggest Japan may have spent around $36.6bn buying yen on Friday’s joint operation, on top of a separate solo intervention in New York the day before worth up to $59bn. The aim is not just FX stability but also to prevent a yen and JGB selloff from causing global spillovers, including extra upward pressure on already elevated US Treasury yields. The intervention is supportive for the Bank of Japan to move rates higher at their September meeting, after the bank kept rates steady at 1% as expected last week. Money market pricing has shifted forward, though still not fully pricing a hike until December, while only pricing a 33% chance of a September hike.

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 is 0.31% weaker at $0.6999. Australian bonds have outperformed US bonds, narrowing the spread to its smallest since November last year. 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 4% chance of a hike next month, down from 21% earlier, and are pricing the chance of year-end hike at 50%. Still, last Tuesday, RBA Governor Michele Bullock said underlying inflation remained too high and a further slowdown in domestic demand may be required to tame prices, though emphasized that the rate outlook remains uncertain as it was not yet clear whether the three rate hikes already delivered would be sufficient.

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 are modestly lower across the curve, following the drop in oil prices ahead of this week’s jobs data, though the 2/10 and 2/30 spreads has remain near two-month highs. The recent steepening of the curve reflets market doubts over the Fed’s ability to tackle inflation. Thursday’s data showed modest real consumption growth with a very soft monthly inflation pulse. Despite the “benign” headline figures in Thursday’s inflation and GDP data, consumer spending rose 3.2% in Q2, up from 0.5% in Q1. Furthermore, sales to private domestic purchasers, a key measure of underlying demand rose 3.9% in Q2 buoyed by tax cuts and strong demand.

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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