First Light News: Diplomacy Alive, but Barely

Once again, we kick things off in the Middle East. The Strait of Hormuz remains shuttered and largely impassable for commercial vessels, and President Trump recently stated that the ceasefire with Iran is on ‘massive life support’. I think it is fair to say that diplomacy is technically alive but functionally moribund at this point!

You will recall that Iran’s counterproposal to the US peace deal demanded control over the Strait and, of course, an end to the US blockade, which has been in place for around a month. Trump reportedly stated that he did not even finish reading Tehran’s proposal and referred to it as ‘garbage’. While I believe he read it in full, his remark does demonstrate the current, non-existent diplomatic situation between the two sides.

Markets: The Studied Shrug

Cross-asset performance shows oil remains at elevated levels, with Brent continuing to find bids north of US$100/barrel yesterday, the USD index trading higher, US Treasury yields bear-flattening, and precious metals modestly rallying.

In the equities space, it was green across the screen again – the market has clearly decided that the US-Iran war is a background condition for the time being. Equities are bolstered by stronger corporate earnings – particularly in AI and technology – coupled with hopes that supply-side constraints in the Middle East will not severely restrict economic output.

Day Ahead: US Inflation and Fed Chair Vote

Today’s data slate falls squarely on the April US CPI inflation report at 12:30 pm GMT. According to LSEG data, headline YY inflation is forecast to rise by 3.7%, underpinned by higher energy prices and marking an acceleration from March’s 3.3% reading, with the YY core measure also anticipated to tick higher to 2.7% from 2.6%.

With the markets expecting a beat on both headline and core, I will be watching the minimum estimates closely: 3.3% and 2.6%, respectively. However, I think the reaction will be more determined by developments in the oil market. If oil is rising and we get a miss, this could limit downside in yields and the USD. Conversely, if oil turns lower during the European session today and we get a beat, this could equally hinder the market’s reaction.

Headline inflation will obviously be driven by higher energy prices. However, it is also worth noting that a stronger beat in the core reading could spark a larger reaction, as it suggests second-round effects are beginning to filter through and would indicate that energy price transmission into broader goods and services is occurring more rapidly than the consensus assumes.

It is important to realise that the Fed remains trapped between a rock and a hard place at the moment. The Fed has little to no control over the energy-led inflation – this is a supply-side issue, and increasing the target rate will do nothing to lower the price of oil. It only cools economic activity and may increase unemployment. If the Fed lowers rates, it risks stoking inflationary pressures, and, as I am sure you have gathered, lower rates do not produce more oil! Hence, the Fed is in a wait-and-see stance, one that is forecast to last at least this year if we consider market pricing – about 7 bps of tightening implied by year-end.

In addition to today’s CPI print, the US Senate is expected to confirm Kevin Warsh as the 17^th Fed Chair to replace Jerome Powell. Warsh cleared a key Senate procedural hurdle on Monday, with a 49-44 vote to advance his nomination as Fed Chair, putting him on course for full confirmation before Powell’s chairmanship expires on 15 May. Only two Democrats crossed the aisle (Fetterman and Coons), and no Republicans defected.

Written by FP Markets Chief Market Analyst, Aaron Hill