We go into a new week with stock markets hitting fresh record highs amid still elevated energy prices. Investors are expecting the Strait of Hormuz to get opened soon because a deal with Iran is ‘largely negotiated’, as President Trump said over the weekend. Crude oil supplies will take some time to get back to any sense of normality, but markets are also celebrating strong corporate earnings, plus a huge and historic IPO pipeline that includes SpaceX and Anthropic in the coming weeks. Nvidia’s results cemented impressive tech numbers this season with first quarter revenues increasing 85% year-over-year. It seems the risk rally can continue, with any inflation problem largely seen as an issue for rates markets and not as yet a global growth issue.
Fixed income markets have been in focus with Treasury yields hitting multi-year highs in recent weeks. But bonds have cheapened lately, partly because markets have pivoted toward pricing Fed rate hikes. A little over a quarter point of rate hikes is priced into year-end and early next year compared to early March when money markets were leaning toward pricing 50 to 75bps of rate cuts. It would appear that there is a very high bar to the FOMC pivoting toward hikes as a consensus call with a new incoming Chair in Kevin Warsh. That would be an about-face to match any seen in central bank history and could also prompt renewed threats to Fed independence. The Fed is already restrictive by contrast to many other global central banks like the BoC, ECB, and BoJ, as the policy rate is above most reasonable estimates of neutral.
The dollar has paused for some breathe after its break higher a couple of weeks ago. Price action looks like bullish consolidation before a move higher, but resistance sits around 99.44 and the late April high. Aside from the above, there is also the small matter of rising stagflation concerns, especially on any sudden escalation in the Middle East. Hot, fresh US inflation data this week could support greenback bulls, with one-month G7 implied FX volatility currently near the lows of the year. That means markets are not priced for any dramatic news; the contrarian in us warns that this can be upended soon enough.