US
Brent crude oil prices are consolidating around $95 a barrel. Stock and bond markets are holding on to recent gains, while USD is firmer against most major currencies. Markets are on standby ahead of Tomorrow’s US-Iran ceasefire expiry. President Donald Trump said the truce expires on “Wednesday evening Washington time”, adding Vice President JD Vance will resume negotiations in Pakistan, “either Tuesday night or Wednesday morning.”
We are sticking to our view that while the energy shock may not be over, the worst is probably behind us. The US “Open for All or Closed to All” approach to navigation for vessels transiting the Strait of Hormuz is more likely to accelerate a reopening of that crucial waterway because shared economic pain raises the incentives for all parties to reach a workable diplomatic off-ramp. As such, interest rate differentials between the US and other major economies should continue to keep the DXY (USD index) anchored within its nearly one-year 96.00-100.00 range.
The Senate Banking Committee confirmation hearing for Kevin Warsh to become the next Fed chair is today (3:00pm London, 10:00am New York). Warsh's monetary policy view and how he plans to shake up the Fed will be heavily scrutinized. In his pre-released opening statement, Warsh stressed his commitment “to ensuring that the conduct of monetary policy remains strictly independent” and positioned himself as an anti-status quo reformer.
ADP employment change for the four weeks to April 4 (1:15pm London, 8:15am New York) and March retail sales (1:30pm London, 8:30am New York) are today’s data highlights. Retail sales are expected to surge 1.4% m/m vs. 0.6% in February on higher spending at gas stations. The more policy relevant control-group sales - which exclude cars, gas, food services, and building materials – is seen rising by just 0.2% m/m vs. 0.5% in February. That aligns with the latest Fed Beige Book, which observed that “On balance, consumer spending increased slightly despite harsh winter weather in some regions and higher fuel prices.”
Fed funds futures imply 50% probability of a 25bps cut by December 2026. Our base case is for the Fed to deliver one cut to 3.25-3.50% by year-end, in line with the FOMC’s projection. The US labor market is mixed with risk skewed to the downside, real consumer spending is almost flat in the first two months of the year, and wages are growing in line with the Fed’s 2% inflation goal given productivity growth of 2%.
UK
GBP/USD is down near 1.3500. The latest UK labor market report was mixed. The unemployment rate unexpectedly dropped -0.3pts in the three months to February to a six-month low at 4.9% (consensus: 5.2%). However, labor demand worsened as payrolled employment fell -11k in March (consensus: 0k) and was revised lower from +20k to -6k in February.
Importantly, easing wage pressures leaves room for the BOE to resume easing later this year. In line with consensus, the policy-relevant private sector regular pay growth slowed to 3.2% y/y in February vs. 3.3% in January. That’s the lowest pace of wage growth since October 2020 and is below the BOE’s Q1 projection of 3.5%.
We expect BOE rate hike bets to flip back to cuts given excess slack in the UK economy. The BOE estimates a negative output gap of -1% of GDP in 2026. Bottom line: GBP/USD will likely trade within a 1.3400 and 1.3700 range in the near term.
UK Prime Minister Keir Starmer’s hold on power is increasingly fragile and weighing on UK government bonds. Starmer is accused of misleading parliament about whether Peter Mandelson had passed security checks before his appointment as US ambassador. Today’s committee appearance by Sir Olly Robbins, a former top civil servant fired by Starmer, won’t silence Starmer exit talk.
Robbins told lawmakers that he felt pressured by the prime minister’s office to rubber-stamp the appointment of Mandelson against the recommendation of security officials. Regardless, the real test for Starmer’s leadership will be the aftermath of the May 7 local and Scottish elections. Stay tuned…
NEW ZEALAND
NZD is outperforming across the board and New Zealand bonds are underperforming. New Zealand Q1 inflation ran hot. Headline CPI rose 0.9% q/q (consensus: 0.8%, RBNZ projection: 0.6%) vs. 0.6% in Q4 to be up 3.1% y/y (consensus: 2.9%, RBNZ projection: 2.8%) vs. 3.1% in Q4. The largest upwards contributor to the annual inflation rate was electricity while higher petrol prices were the largest contributor to the quarterly inflation rate.
The swaps curve has more than fully priced in a total of 100bps of policy rate increases to 3.25% over the next twelve months. However, contained underlying inflation and ample spare capacity in New Zealand’s economy argue for less rate hikes than markets imply. The RBNZ sectoral factor inflation model dipped to 2.7% y/y vs. 2.8% in Q4 and the bank forecasts a negative output gap of -0.9% over 2026. Bottom line: NZD/USD will likely trade within a 0.5800 and 0.6000 range in the near term.
