Dip Buying, AI Support SIFs

MACRO FRAME

Global equity markets continue to remain focused on US-Iran peace negotiations and a potential reopening of the Strait. Inflationary pressures continue to mount amid the closure, setting up this week’s CPI data to be the main event of the week.

STOCK INDEX FUTURES

Equity index futures moved higher overnight as tech continues to lead gains, mainly thanks to AI-related stocks. In recent months, sharp pullbacks have been met with aggressive buying, which has become more common place. Meanwhile, a fall in oil prices also lifted sentiment. Regardless, strong quarterly earnings  have offered momentum and strong fundamentals for investors. Oracle will report quarterly earnings on Wednesday, which markets will take to see how strong the legs are on the AI rally. While Friday’s selloff was the result of reduced AI spending fears in the economy, AI expenditures are likely to be little affected by a move higher in rates, which should continue to offer further tailwinds to the recent rally. This week’s big event will be Wednesday’s CPI data, which offers downside risk to equities if inflationary pressures spur market worries that the Fed could raise rates multiple times in the coming months. Forecasts are expecting inflation to rise from 3.8% to 4.2%, with core expected to rise modestly from 2.8% to 2.9%.

Watch point: Details regarding tanker traffic through the Strait will be a catalyst for global markets and may significantly reprice expectations over Fed policy, though negotiations are likely to need further time.

CURRENCIES

US DOLLAR: The USD index is down 0.32% to 99.72 as traders appeared hopeful of a potential peace deal between the US and Iran with the fall in oil prices. Mainly, traders are awaiting tomorrow’s CPI data after May’s nonfarm payrolls data set up conditions for the Fed to raise rates if they choose. Prior to May’s jobs report, traders were already growing more convinced of a Fed hike. Money markets are currently pricing a 66% chance of a hike before year end and are fully priced for a hike by January.

Since the conflict began, the dollar has been a gauge for broad risk sentiment. The main driver of dollar weakness remains risk-on flows in the face of market optimism over an end to the conflict in the Middle East, which markets expect would drop a growing hawkish bias from the Fed. However, pass-through effects from supply chain disruptions and the rise in energy prices are likely to make it difficult for the  Fed to lower rates over the next two quarters even if the Strait was reopened today.

Watch point: Demand for dollar liquidity remains heightened amid the flare up in hostilities, while May’s jobs report has provided the greenback with stronger support, potentially sustaining a break above into a higher range.

EURO: The euro is 0.34% higher at $1.1574 as attention centers around the European Central Bank’s policy decision, though markets have priced in a rate hike from the central bank for some time now. Views of policymakers over second-round effects on inflation and whether or not that requires further policy tightening will in focus. Comments from policymakers that second-round effects are of major concern are likely to bolster the euro and reinforce expectations of additional rate hikes from the ECB this year.

Money markets continue to expected two rate hikes by year-end and are currently priced for a third hike in July of 2027, underscoring a hawkish-theme in monetary policy over the next several quarters. However, a potential factor which could limit the need for additional policy tightening after June, would be that services inflation eased in the most recent data. Still, the ECB maintains the scope to tighten policy without worrying about impacts to economic growth, though the extent to which policy tightening is necessary may be limited to just one rate hike if the Strait is reopened within the month and if services inflation does not pick up. For the euro, broader risk sentiment will continue to determine price direction, while the interest rate differential against the dollar remains unfavorable given the recent shift in Fed expectations.

Watch point: While a June rate hike is expected from the ECB, a peace deal and restoration of oil flows through the Strait is likely to reduce tightening expectations.

BRITISH POUND: Sterling rose 0.47% to $1.3401 as risk sentiment improved alongside a rally in global equity markets. While recent attention has been focused on UK politics, apart from US-Iran news, traders have been focusing on economic factors in the UK ahead of GDP data on Friday. Recent PMI data has been revised upwards, which could reflect that the drop in sentiment over the economy may be overstated. Still, economic factors were a challenge ahead of the outbreak in hostilities between the US and Iran. Despite a dovish repricing of Bank of England expectations, the sterling has gained as a result of the reduction in geopolitical risk and decline in demand for the dollar. Money markets have priced a rate hike out to December, while a second rate hike is no longer. A BoE survey on Friday showed British businesses expect to increase prices less quickly in the year ahead than they did in April.

JAPANESE YEN: The yen is little changed at 160.19 yen per dollar. Intervention risk remains front of mind for traders as the currency breaks the 160 level. Any further depreciation in the yen is likely to be met with warnings from Japanese officials and raises the risk of official intervention. Traders are likely not willing to challenge official buying from the Bank of Japan or Japanese Treasury, though not excited to take up bullish positions either. Still, despite the risk of intervention, traders have continued to build short yen positions in recent weeks.

AUSTRALIAN DOLLAR: The Aussie is 0.24% higher at $0.7463 as risk sentiment firmed, while Chinese trade data showed imports beat expectations, a positive for Australia given Asia is their largest export market. The NAB recently called off their expectation of another rate hike from the Reserve Bank of Australia, saying they expect a slowdown in the economy to limit price growth. Still,  demand is largely outpacing supply, labor conditions remain tight, leaving the inflation bias pointed upwards. While the RBA has broadly signaled that it is in a wait-and-see mode following three rate hikes earlier this year, markets are still expecting one more rate hike by the end of the year. Trimmed mean measure inflation sits at an annual pace of 3.4%, which is likely to reinforce a tightening bias from the RBA. Markets have slashed tightening expectations in the near term and are no longer fully priced in for a hike over the coming 12 months.

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 lower across the curve, tracking the moves in oil as risk sentiment improves across global markets. Friday’s May nonfarm payrolls has removed labor market fragility from the Fed’s calculus. The FOMC now has the green light to hold or move rates higher, shifting focus squarely to Wednesday’s May CPI release ahead of the June 16–17 meeting. Markets price near-certainty on a June hold, but Wednesday carries outsized weight for hike expectations later in the year. The leading indicators are hawkish: ISM Manufacturing Prices Paid hit 82.1 in May, near its highest since 2022, and the Services Prices Index rose to 71.3. The key question is whether these pressures prove transitory or represent a durable second-round impulse. If core CPI prints above 3.0% annualized, that argument becomes hard to sustain, the April FOMC minutes already warned that “some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.”

The Treasury market has already begun pricing this scenario with the 2-year yield at 4.16% and the 10-year at 4.56% as of Monday. Substantial curve flattening has been consistent with market sentiment repricing the front end for hikes rather than cuts.

Watch point: The path to tightening has become more evident ahead of Wednesday’s inflation data. Traders will look for evidence that price pressures have become more broad based as a gauge on policy expectations.

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