This week, the market’s focus has swung back and forth between easing geopolitical risks and the Fed’s shift toward a hawkish stance.
Early in the week, as the U.S. and Iran signed a preliminary agreement—creating room to extend the ceasefire, resume shipping through the Strait of Hormuz, and advance follow-up nuclear negotiations—investors’ expectations for further de-escalation in the Middle East rose significantly.Inflation concerns previously driven by energy supply disruptions eased somewhat, oil prices fell rapidly, and risk appetite rebounded accordingly.
However, the market’s optimism did not fully hold.On Thursday, newly appointed Federal Reserve Chair Wash kept interest rates unchanged at her first FOMC meeting, but the policy statement significantly scaled back forward guidance and refocused the committee’s priorities on “restoring price stability.”The updated dot plot also showed that the Committee’s assessment of the future policy path had shifted markedly toward a more hawkish stance compared to March; rate cuts are no longer the baseline scenario the market had previously anticipated, and the likelihood of keeping rates unchanged or even raising them again this year has been repriced.
This shift was quickly reflected in cross-asset trends.Short-term U.S. Treasury yields rose, the U.S. Dollar Index strengthened, and non-interest-bearing assets such as gold came under pressure.On the one hand, the market acknowledges that falling oil prices will help alleviate future inflationary pressures; on the other hand, it is concerned that the Fed will place greater emphasis on the risk of second-round inflation already caused by the energy shock of the past few months. Consequently, the U.S. Treasury yield curve showed a marked divergence this week: the short end was more sensitive to rate hike expectations, while the long end was supported by declining long-term inflation expectations and safe-haven buying.