Oil Up, Stocks Down

MACRO FRAME

US economic data this week (PMI, payrolls), paired with a host of Fed speakers is likely to significantly shape the near-term outlook for the Fed.

STOCK INDEX FUTURES

Equity index futures moved lower as oil prices rose 3-4% after President Trump rejected Iran’s peace proposal. Data from LSEG shows the 60-day rolling correlation between oil prices and stock index futures is at its highest level since late May, suggesting traders are increasingly treating oil as a direct-impact macro variable. The move in oil underscores an already-sensitive point in the rates cycle, with markets assigning a 66% probability of an October hike, and are fully priced in for a second rate hike by January. The repricing reflects both strong US activity and a more persistent energy-driven inflation concern. This week’s August PCE inflation report, September nonfarm payrolls, ISM manufacturing PMI, and several Fed speakers will play a large role in validating or rejecting market expectations of an October hike. While this week’s Fed speakers are expected to issue hawkish remarks, weak data could push back tightening expectations and lift the equities. However, following last week’s strong PMI data, further indications of economic strength will validate rate-hike expectations and push yields higher, creating more downside potential for equities.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index rose 0.12% overnight to 101.09, following moves in oil. August PCE, September payrolls, ISM manufacturing PMI, and several Fed speakers will play a large role in validating or rejecting market expectations of an October hike and consequently the dollar’s move higher since 9/16. Fed speak is expected to be hawkish, which will leave direction dependent upon this week’s data releases. Recent economic data has indicated strength in the economy and supported market expectations of another rate hike in October or December. Meanwhile, renewed energy concerns and a number of hawkish Fed speakers have also underpinned near-term rate hike expectations. Money markets are priced for 50 bps of tightening by January.

Watch point: A reduction in tightening expectations for the Fed will act as the greatest risk to the dollar maintain its move above the 100 level.

EURO: The euro fell 0.14% to $1.1375 as higher oil prices weighed on the currency amid broad dollar strength. A packed slate of data in the US and inflation data out of Europe this week will play the dominant role in price direction. Hawkish remarks from Fed officials, alongside strong economic data out of the US have reinforced expectations of tighter US monetary policy, which reflects a similar environment to the eurozone. The euro has experienced a raft of data and language from policymakers very similar to the Fed, supporting prospects for a potential October rate hike. Markets have priced an October hike at 50% and are fully priced for a hike in December. Money markets roughly expect the ECB to hike as much as the Fed in the next 12 months. This sets up this week’s inflation data to either validate or reject expectations of a potential October hike. If inflation comes in hotter-than-expected, markets are likely to increase expectations of near-term tightening, supportive of the euro.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which has been favorable to the dollar in advent of a hawkish repricing in Fed policy expectations the near-term.

BRITISH POUND: Sterling little changed at $1.3256, gaining support from stronger market expectations over Bank of England tightening. Money markets are priced for four rate hikes over the next 10 months from the BoE, and see an 83% chance of a move in November. However, that pricing appears at odds with current economic conditions in the country, which will limit the central bank from tightening rates as aggressively as markets expect. Revised second-quarter GDP data on Wednesday, followed by the final estimate of manufacturing PMI data on Thursday could impact this narrative. Fiscal policy is also in focus. Finance minister John Healey is scheduled to deliver a speech at the Labour Party’s annual conference on Monday, where he is expected to unveil investments to boost growth and employment, while reducing the burden of the welfare bill.

Watch point: We expect macro factors to pressure the pound with fundamentals favoring a stronger dollar. We look for GBP/USD to weaken in Q4 2026.

JAPANESE YEN: The yen is little changed at 157.20 yen per dollar. Support for the yen is coming from overnight comments from currency diplomat Atsushi Mimura, who said that markets should take at face value the “very clear” message Tokyo and Washington delivered last week on the yen. Last week, Finance Minister Katayama and Treasury Secretary Bessent reaffirmed their cooperation to combat yen weakness. Meanwhile, data overnight showed inflation in Japan’s services sector rose to its fastest annual pace in two years, which has modestly increased expectations of near-term tightening from the BOJ. Markets are pricing roughly a 41% chance of a hike in October and see 23 bps of tightening by year-end. Sentiment regarding the currency has been damaged after the BOJ underwhelmed the investors following its divided decision to raise rates and Governor Ueda’s unconvincing press conference earlier this month, which leaves potential market intervention as the greatest near-term upside risk for the currency.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7021, still near its lowest level since early-August. Despite dollar strength, the hawkish outlook for the Reserve Bank of Australia is offering the currency support to remain above $0.70. The RBA’s policy meeting began today and the bank is expected to announce a 25 bp rate increase on Tuesday after recent labor and inflation data have come in stronger-than-expected and showed that inflation pressures extend well beyond the labor market. Following the bank’s meeting, monthly inflation data for August will come out on Wednesday and is expected to affirm fears of rising inflation. Q3 inflation figures will continue to serve an outsized role in determining RBA policy and given that the September policy meeting is a month before the release, policymakers could wait until that data arrives before making any decisions.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields moved higher across the curve amid the rise in oil prices. August PCE, nonfarm payrolls, ISM manufacturing PMI, and several Fed speakers will play a large role in validating or rejecting market expectations of an October hike. This week’s Fed speakers are expected to issue hawkish remarks leaving more emphasis on this week’s data; weak data could push back tightening expectations and see a modest pullback in yields. However, last week’s strong PMI data has reflected economic strength and further indications of growth are likely to validate rate-hike expectations and push yields higher. Broadly, the story for the bond market remains little changed. Thus far, markets have absorbed the rise in yields because nominal growth, corporate profits, and AI-related investment remain robust. Evidence of weak Treasury-auction demand, deteriorating market liquidity, a sharper rise in mortgage spreads, or further acceleration in inflation expectations would signal that risk is becoming more material.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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