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As we kick off the first full week of May, we are reminded that the Middle East conflict is far from over. President Trump’s ‘Project Freedom’ – an operation to escort stranded vessels through the Strait of Hormuz – has so far had the opposite effect, with both the US and Iran trading fire, and involving the UAE. Unsurprisingly, both sides have offered different accounts and seem to be narrating entirely different wars.
While everyone continues to say that things in the Middle East will improve, this does not seem to be the case, with neither country showing signs of backing down. There appears to be a disconnect here, and the situation remains tenuous: the ceasefire is clearly not ceasing!
What is not in dispute, however, is the market reaction. Spot oil prices rose on Monday, with Brent and WTI benchmarks up 4.5% and 2.6%, respectively. Brent has recorded its highest daily close since the US-Iran conflict began and is edging closer to the US$119.50 peak set in early March.
US Treasury yields also bear-flattened yesterday amid rising inflation expectations, with the 30-year yield closing above 5.00% for the first time since mid-2025 – which could see Treasuries bid, as has been the case since late 2023 – while the benchmark 10-year yield is approaching March highs of 4.48%.
In the US equity space, major indexes closed lower. The S&P 500 slipped 29 points (0.4%) to 7,200, the Nasdaq 100 shed 58 points (0.2%) to 27,651, and the Dow Jones dropped 557 points (1.1%) to 48,941. As you can see, the Nasdaq was somewhat cushioned by the recent robust earnings.
I think the most telling observation here is that the market is clearly priced for a resolution that is not happening. This has also been reflected in recent Polymarket odds; as you can see in the chart below, a US-Iran peace deal by mid-May is now 4%, with a deal by the end of May at 13%, down from 74% on 17 April!
Overnight, the RBA’s April decision landed. As widely expected, the central bank raised the cash rate by 25 bps to 4.35% for the third consecutive meeting, erasing the three cuts made in 2025. The decision came amid Q1 26 Aussie CPI inflation jumping to 4.1% from 3.6% in Q4 25, with the RBA’s core measures remaining north of the central bank’s 2-3% target.
I think it is fair to say that the RBA is well ahead of the pack right now. That said, while markets are still pricing in 32 bps of tightening by year-end, the central bank stopped short of providing clear hawkish guidance and adopted a more cautious tone, noting that ‘monetary policy is well placed to respond to developments and the Board is focused on its mandate to deliver price stability and full employment’. That was enough to reduce the impetus for AUD bids versus the USD.
Looking ahead, we have the US April ISM services PMI and March JOLTS job openings data hitting the wires today at 2:00 pm GMT.
The ISM services PMI is expected to come in at 53.7, slightly below the March reading of 54.0. However, it is important to note that the April S&P Global flash services print was 51.3, with selling prices and input costs rising considerably and new business growth the slowest in two years. If the ISM reading tells a similar story, it would further reinforce the stagflation narrative.
The JOLTS job openings figure is expected to fall to 6.86 million from 6.88 million. A number below expectations would give Fed doves some ammunition. An upside surprise, on the other hand, would strengthen the case for the three Fed dissenters who already refused to endorse an easing bias last week.