Markets Sharply Lower

MACRO FRAME

The renewed geopolitical risk backdrop adds another layer of uncertainty heading into Friday’s jobs report, with markets watching whether labor data alters expectations for the Federal Reserve’s policy path.

STOCK INDEX FUTURES

Equity indexes are sharply lower as risk sentiment deteriorates following Monday’s rebound, when US stocks largely brushed aside the conflict in Iran and the S&P 500 logged its largest intraday recovery since November. Investor confidence faded after President Trump said the conflict could last for weeks and that uncertainty remains over Iran’s leadership following reports surrounding Supreme Leader Ayatollah Ali Khamenei.

On the data front, ISM manufacturing printed at 52.4, above forecasts and marking a second consecutive month of expansion, though slightly below January’s 52.6. Gains in new orders, production, and inventories supported the headline figure, while employment and demand indicators remained subdued. Notably, the prices-paid index surged to 70.5 from 59, its highest level since June 2022, signaling renewed inflationary pressure as producers adjust to higher input costs.

Tariff-related uncertainty continues to amplify volatility following February’s Supreme Court ruling, adding another layer of policy risk to an already fragile sentiment backdrop.

Watch point: With existing trade deals in limbo and recent data supporting a pause from the Fed, focus will center around Iran and Friday’s labor report for macro direction.

CURRENCY FUTURES

US DOLLAR: The USD Index rose 0.8% to 99.18 as escalating tensions in the Middle East triggered flight-to-quality flows and revived inflation concerns tied to higher energy prices. The dollar is benefiting from the US’s relative energy independence, while currencies more exposed to potential supply disruptions have come under pressure. As both a major oil producer and issuer of the world’s reserve currency, the US remains a natural destination for defensive capital.

The dollar saw its strongest move following reports that Iran ordered the closure of the Strait of Hormuz and amid headlines of attacks on energy infrastructure. Near-term price action is likely to remain headline-driven, with sustained upside risks should energy markets tighten further and inflation expectations reprice higher.

From a macro standpoint, resilient domestic demand and persistent services inflation continue to provide modest support to the dollar. Friday’s labor data is not expected to materially alter Fed policy expectations.

Watch point: A sustained spike in crude prices would reinforce the dollar’s safe-haven bid, while any de-escalation in regional tensions could prompt a partial unwind of defensive positioning.

EURO: The euro fell 0.77% to $1.1596 as the conflict in Iran has triggered worries over higher energy prices and highlighted Europe’s reliance on crude imports, which dragged on the currency despite a stronger-than-expected inflation reading overnight. February data showed eurozone annual inflation unexpectedly rose to 1.9%, while core inflation rose to 2.4%, both above forecasts. Price pressures strengthened notably in services, where inflation accelerated to 3.4% from 3.2%, while non-energy industrial goods inflation picked up to 0.7% from 0.4%. Last week, European Central Bank President Christine Lagarde said headline inflation is expected to approach the 2% target over the medium term, though Middle East tensions cloud the outlook. Money market pricing still reflects no change in policy from the ECB in 2026.

With European Central Bank policy expected to remain on hold for the rest of the year, dollar dynamics will play an outsized role in price direction as the conflict in the Middle East continues.

Watch point: A sustained rise in oil prices would disproportionately pressure the euro via terms-of-trade effects, while stabilization in energy markets could allow inflation dynamics to regain influence over policy expectations.

BRITISH POUND: Sterling fell 0.78% to $1.3301 as escalating Middle East tensions drove energy prices higher and reinforced dollar safe-haven flows. The renewed risk aversion compounded existing pressure on the pound, which has already been weighed down by concerns over the UK’s growth outlook and lingering political uncertainty.

Rising oil prices have also reshaped rate expectations. Traders now price just a 22% probability of a rate cut at the Bank of England’s upcoming meeting, down sharply from 75% last week, as higher energy costs risk complicating the disinflation narrative.

On the fiscal front, Finance Minister Rachel Reeves said the economy is projected to grow 1.1% this year, according to updated Office for Budget Responsibility forecasts, underscoring a modest growth backdrop that leaves sterling sensitive to both energy dynamics and policy expectations. The figure was weaker than a forecast of 1.4% growth for 2026 in the OBR’s previous outlook published in November.

Watch point: A March rate cut is now in question with renewed geopolitical risks and a potential sustained rise in energy prices.

JAPANESE YEN: The yen weakened 0.28% to 157.80 as escalating tensions in Iran pushed energy prices higher, highlighting Japan’s vulnerability as a major energy importer and reinforcing dollar strength. Safe-haven flows have favored the USD, given concerns over Japan’s terms-of-trade exposure.

Finance Minister Satsuki Katayama said authorities are monitoring markets with an “extremely strong sense of urgency” and reiterated that Japan maintains an understanding with the US regarding currency stability, keeping intervention risk in focus. Meanwhile, Bank of Japan Deputy Governor Ryozo Himino reaffirmed that the central bank will continue raising rates, though without committing to a timeline. Investors now await remarks from Governor Kazuo Ueda for further policy clarity.

Last week’s nomination of two reflation-leaning academics to the BoJ board, along with reports that Prime Minister Takaichi has expressed reservations about additional tightening, has added uncertainty to the policy outlook. Money markets continue to price a rate hike by July.

Watch point: A move beyond the ¥158–160 range would likely intensify intervention rhetoric, while sustained energy-driven inflation could keep tightening expectations intact despite political pressure.

AUSTRALIAN DOLLAR: The Aussie 1.1% to $0.7012 as escalating tensions in Iran weighed on risk sentiment and supported the US dollar. Despite the pullback, the AUD found some underlying support from expectations that the Reserve Bank of Australia may tighten policy in the near term. Australia’s status as a net energy exporter, primarily through LNG and coal, also cushions the currency against rising oil prices relative to energy-importing peers.

RBA Governor Michele Bullock said the March meeting would be “live” for a potential rate increase, marking a shift from her recent patient tone. She warned that an oil price shock linked to Middle East tensions could reignite domestic inflation pressures, underscoring the sensitivity of the outlook to global developments.

Markets currently price a 28% probability of a 25 bp hike in March, with a move in May fully priced in. Investors also see roughly a 75% chance of a further rise to 4.35% by year-end.

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 moved higher as escalating tensions in Iran fueled concerns that rising energy prices could keep inflation elevated and delay Federal Reserve easing. Monday’s stronger-than-expected ISM reading added upward pressure, with the prices-paid index climbing to a more than three-year high. Notably, the typical safe-haven bid in bonds failed to materialize, suggesting inflation fears are outweighing defensive flows.

Markets have pushed expectations for the next Fed rate cut back to September from July, with June odds falling to roughly 37%. Total easing priced for year-end has narrowed to about 43 bps, down from 53 bps last week, and two cuts are no longer fully priced for 2026. Attention now shifts to Friday’s jobs report, which will provide further clarity on whether labor-market resilience continues to justify a patient Fed stance.

Watch point: With labor data pointing to continued stability and inflation remaining sticky, even as the year-over-year pace eased slightly, a late summer rate cut still remains the base case.

The spread between the two- and 10-year yields is 54.70 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.557%.

 

 

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