Good morning. Oil prices and Treasury yields are easing as markets grow more confident that a deal between America and Iran could reopen the Strait of Hormuz, despite a series of military actions in recent days. The Strait, through which roughly a fifth of global oil supply passes, has been closed for almost three months. Brent crude is trading for nearly $96 a barrel and West Texas Intermediate at $90, both sharply lower than a week ago. Equity futures are pointing to a modest advance at the open, and the dollar is little changed, with the Canadian dollar, sterling, euro and yen all eking out incremental gains against a light economic data backdrop**.
Central bankers are maintaining their hawkish rhetoric. The kiwi** jumped last night when the Reserve Bank of New Zealand held rates steady but warned that tightening would probably need to come sooner, and in larger increments, than previously expected. In Tokyo, the Bank of Japan’s Kazuo Ueda cautioned that even temporary shocks can become entrenched if they begin to shift wages, expectations and price-setting behaviour. And at the European Central Bank, board member Isabel Schnabel told Reuters that the damage already done to energy infrastructure and supply chains meant that looking through today’s price surge was no longer an option—and that a rate hike in June is now, in her view, necessary.
Expectations for Federal Reserve rate hikes are holding firmer than elsewhere, and tomorrow’s data are unlikely to change that. The personal spending and income report is expected to show both headline and core inflation running well above the Fed’s target range, even as households enjoy solid income gains and continue to spend freely. Durable-goods orders are likely to tell a similar story.
The American economy continues to outperform, despite everything thrown at it. Private-sector hiring remains soft, but recent payrolls reports are consistent with renewed momentum. Consumer spending, the economy’s biggest engine, is being sustained by positive wage growth, accumulated household wealth, and tax-cut tailwinds. Household balance sheets are healthy, with low leverage and strong equity-market gains providing a cushion against shocks. The corporate earnings outlook remains solid, and capital continues to pour into artificial intelligence, propping up overall investment even as other sectors hold back. For now, this economic resilience should underpin a firm dollar, even if a US-Iran peace deal leads to an unwind in safe-haven trades.
More broadly, the prospect of a resumption in global oil flows is doing more to shape sentiment than any single data point—but with central banks worldwide signalling that the inflation genie is in danger of popping out of the bottle, any setback in negotiations could quickly reverse the calm and trigger a resumption in currency volatility.
*You might assume a lack of data means lower volatility, but note that idle trader hands are the market devil’s plaything.
The New Zealand dollar, named after the flightless bird on the coin. Currency traders love nicknames: the pound-dollar exchange rate pair, for instance, is known as “cable”—because it snaps with some regularity*.
***This is not really why.