Market reaction to the weekend’s Iranian attack on Israel has been muted. Intentionally or not, Tehran telegraphed its actions well in advance, most of the missiles and drones were downed before reaching military targets, and its diplomats signalled a desire to de-escalate things further, telling the UN “the matter can be deemed concluded”. Israel’s war cabinet authorised retaliatory strikes, but a sternly-worded message from the White House appears to have put reprisals on the back burner for now. Longer-term escalation remains a risk, but investors generally struggle to assign probabilities to more complex, path-dependent outcomes, so the conflict looks likely to fade as a market driver until Israel responds.

Global oil benchmarks are lower, equity futures are pushing higher, and the safe-haven Japanese yen is trading near a post-1990 low. The greenback is trading on a stronger footing after climbing more than 1.6 percent last week when US inflation data topped forecasts and European policymakers signalled a willingness to front-run the Federal Reserve in cutting rates.

Speculative positioning turned even more dollar-positive last week. Friday’s CFTC Commitments of Traders report, which captures last Tuesday’s futures positions, showed a rotation toward the euro, Aussie, and Mexican peso, with yen, sterling, Swissie, kiwi, and the loonie seeing some selling. The greenback long hit $17.5 billion, representing the biggest bet since September 2022, and pointing to some overcrowding – which, to us, suggests that a tipping point could be reached in coming weeks if US data begins to soften.

The yen is getting closer to triggering intervention. The scale and speed of the exchange rate’s decline has accelerated in recent days, making a rise in global energy benchmarks more likely to translate into a rise in cost-push inflation – of the type that the Bank of Japan is unlikely to welcome. We don’t believe policymakers are focused on a particular “line in the sand” level at which they intend to mount a defence, but an extension in the current move could easily generate a response, with any move likely to coincide with North American trading hours.

Ahead today: Economists think headline retail sales growth slowed last month as a drop in auto sales offset higher gasoline prices, but the less volatile “control group” measure is seen holding at 0.3 percent on a month-over-month basis. Overall consumption patterns are shifting as households shift spending toward intangible services – away from the physical items that dominated during the immediate post-pandemic period – but we also expect demand to subside over the coming year as savings are drawn down, wealth effects fade, and credit volumes increase.

The San Francisco Fed’s Mary Daly will speak again today, but her views seem well-understood in markets after last week’s raft of communications. On Friday, Daly said “There’s absolutely, in my mind, no urgency to adjust the policy rate. Policy is in a good place right now, and I need to be fully confident that inflation is on track to come down to two percent – which is our definition of price stability – before we would consider a rate cut”. Her counterpart, Kansas City’s Jeffrey Schmid, was more pointed on the upside risks, saying “With inflation running above target, economic growth continuing to show momentum, and elevated prices across a range of asset markets, the current stance of monetary policy is appropriate”. “Rather than preemptively adjust the policy rate, I would prefer to be patient and wait for clear, convincing evidence that inflation is on track to hit our two percent target before adjusting the stance of policy”.

Tomorrow’s Canadian inflation print could be a market-mover. The consensus sees gasoline-powered headline year-over-year price growth coming in a little hotter, but an unexpected March rebound in the Bank of Canada’s preferred core measures could generate a violent reaction in currency markets. We’re of two minds on the likelihood of a US-style surprise: on one hand, weak domestic consumption should continue to ease price pressures, yet the economy is showing signs of a springtime “melt-up”, and many of the factors that drove inflation lower in the first two months of the year could turn out to be one-off distortions in retrospect.