PPI Hot as Well

MACRO FRAME

The US-Iran deadlock has shaped expectations that a stalemate between the two countries is the new status quo, leaving April’s hot CPI and PPI to challenge the market’s prior assumption that the conflict would remain largely contained from a US macro standpoint. While tech/AI leadership may continue to provide a floor, the combination of firmer energy-driven inflation, more constrained Fed easing expectations, and rising geopolitical risk leaves risk sentiment vulnerable into the Trump-Xi meeting.

STOCK INDEX FUTURES

Equity index futures are lower, falling steeply after April’s PPI data showed prices surged 1.4%, the largest monthly advance since March 2022, bringing the 12-month gain to 6.0%, the highest since December 2022, as price pressures broadened significantly across the supply chain. Core PPI rose 0.6%, the largest monthly advance since October 2025, and is now running +4.4% year-over-year, the hottest reading since February 2023, suggesting upstream price pressures remain far from contained. Markets remain cautiously constructive amid President Trump’s visit to Beijing, but the next leg in sentiment will likely depend on progress on trade, with geopolitical noise still capable of disrupting confidence. The tech sector is likely to find optimism in that Nvidia’s Jensen Huang is accompanying Trump to Beijing. Oil prices moved modestly lower overnight; Iran and the US remain in deadlock over negotiations, with seemingly no sense of progress made on a peace resolution between the two countries. The deadlock in negotiations has maintained the inflationary backdrop following yesterday’s +0.6% MoM headline and +0.4% MoM core CPI readings and today’s hot PPI data. Following the releases, markets have nullified any expectations of policy-easing from the Fed this year.

Watch point: Trump’s rejection of Iran’s peace proposal and April’s CPI and PPI prints have lead traders to reprice Fed policy expectations, affirming no action for the remainder of the year.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.25% higher at 98.54. The dollar remains well bid on the inflationary backdrop and safe-haven demand amid the US-Iran stalemate. Following yesterday’s CPI and today’s pipeline inflation data, markets have largely priced out any chance of a rate cut from the Fed this year and have shifted expectations modestly to the hawkish side, albeit with somewhat trivial odds of a hike. Paired with last week’s labor data that has reinforced the market narrative that the Fed will keep a hold on rates for the near-future, the dollar is likely to find solid underlying support amid the continuation of the deadlock in negotiations.

Watch point: Stalled optimism around a US–Iran resolution will continue to offer safe-haven support for the dollar. Fed policy expectations are likely to reinforce near-term dollar strength.

EURO: The euro is 0.28% lower at $1.1706. Ongoing geopolitical themes continue to pressure the euro, while US Treasury yield differentials and a weak preliminary Q1 GDP reading (0.1% QoQ) have also capped the euro’s upside. Developments regarding the US-Iran conflict will continue to be the dominant factor in price direction for the euro; upward moves in oil are likely to continue to pressure the currency.

Markets are pricing a 87% chance of a hike at the June meeting and are nearly priced for two additional rate hikes by year-end. However, the ECB maintains a well-positioned stance on policy and it could be too early to justify a rate hike without further evidence of oil-induced inflation pressures across the broader economy. However, recent inflation data out of the US suggests that a move upwards is the most likely scenario; the only thing up in the air would be the timing of the next move.

BRITISH POUND: Sterling is 0.37% lower at $1.3490. Alongside pressure from higher oil prices, the pound remains under duress amid political developments as multiple MPs have called for Prime Minister Starmer to resign following heavy losses for the Labour party in local elections last week. For now, Starmer has resisted calls to resign, which is likely to offer some calm to FX markets. Political uncertainty is likely to play a major theme in price action for the pound in the coming months. Amid the inflationary backdrop, gilt markets are likely to remain under pressure and consequently weigh on the pound. Investors are largely worried that a new Labour leader will increase fiscal stimulus and raise gilt issuance, weighing on the pound. The Sterling is likely to remain under pressure as long as political uncertainty persists, though the nomination of a fiscally conservative candidate could help stabilize sentiment, though that does not appear to be a situation for which the market is expecting.

JAPANESE YEN: The yen slipped 0.14% overnight to 157.86 yen per dollar. US Treasury Secretary Bessent overnight said that excess volatility in the currency market is undesirable, a move which offers support to Tokyo’s most recent round of currency intervention. However, intervention alone is likely not going to be sufficient enough to strengthen the yen, given the currencies vulnerabilities to higher energy prices. Overnight on Tuesday, the yen briefly jumped from 157.70 to 156.75, spurring speculation that a rate check had taken place.  Recent interventions from the Japanese government alongside repeated verbal warnings from officials are keeping the yen in a tighter range and limiting selling pressure against the currency with the 160 level acting as a level of support. Markets now pricing a 69% chance of a hike come June.

AUSTRALIAN DOLLAR: The Aussie held steady overnight at $0.7245, while broader risk sentiment remains in check amid uncertainty in the gulf. The Aussie has found support around $0.7205 in recent sessions, while the inflationary backdrop also remains supportive. Australia’s 2026-2027 budget points to underlying cash deficits in the mid‑30‑billion range in 2026–27, roughly 1% of GDP, helped by strong commodity‑price‑driven revenue while still accommodating new spending. The figures were in line with market expectations, leaving inflationary risks mainly up to the Reserve Bank of Australia. Markets still imply around a 20% chance of a June hike to the 4.35% cash rate, but the probability of an August hike to 4.60% moved further above 80%. However, a reopening of the Strait this month would likely result in the board holding on rates. The main downside risk for the Aussie in the near term remains the geopolitical bid.

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 keep the RBA on a tightening path.

TREASURY FUTURES

Yields are modestly higher across the curve, jumping higher following the release of April’s PPI data. Goods prices led the charge, jumping 2.0%, driven overwhelmingly by a 7.8% spike in energy costs (gasoline alone +15.6%), while services added 1.2% on the month, led by a 5.0% surge in transportation and warehousing and a 2.7% rise in trade service margins. The core reading rose 0.6% to its largest monthly advance since October 2025  and is now running +4.4% year-over-year, the hottest reading since February 2023, suggesting upstream price pressures remain far from contained. Intermediate demand revealed unprocessed goods PPI is now up +20.9% YoY, the biggest 12-month increase since September 2022, with crude petroleum (+11.3% MoM) the primary driver. Stage 2 intermediate demand rose 2.8% MoM and is up +11.1% YoY, signaling that cost pressures have not yet fully passed through to final demand. Paired with Tuesday’s hot CPI data, the odds of Fed easing this year are beginning to unwind materially.

April’s strong hiring headline revealed several signs of weakness in the labor market: involuntary part-time workers surged, the broader U-6 underemployment rate rose to 8.2%, short-term unemployment jumped by 358,000 to 2.5 million, while the labor force participation rate fell to 61.8%, its lowest since October 2021, indicating rising job turnover or worker exit from the labor force. Overall, the healthcare sector continues to mask underlying softness, increasing stagflationary worries. Given these dynamics, I would expect Treasury yields to remain largely rangebound in the absence of new geopolitical developments, though that situation appears hard to grasp given Trump’s trip to China.

Watch point: Fed policy is poised to stand pat for the time-being, though a path to loosening remains open. Well-anchored inflation expectations should offer resistance to substantially higher yields, while also supporting the case for Fed easing later in the year.

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