The markets received a brief respite from the Middle East headlines with the release of the CPI and later the Michigan Consumer Confidence.
The latest US CPI report showed a sharp headline acceleration driven mainly by energy, while underlying inflation trends remained relatively contained. Headline CPI rose 0.9% per cubic meter in line with expectations, but the year-on-year pace increased by 2.4%, well above the previous 0.3%. The surge was almost entirely due to energy, with the index rising 10.2% and gasoline prices rising more than 21% on the month as geopolitical tensions pushed crude higher. Importantly, gasoline prices remain about 40% above pre-war levels, suggesting there may still be excess pipeline pressure in the near term – although this will reverse over time if the ongoing ceasefire continues.
Beneath the surface, core inflation data was more encouraging. Core CPI rose only 0.2% m/m for the second consecutive month, well below the expected 0.9%, with a year-on-year rate of 2.6% versus an expected 2.7%. The SuperCore measurement also declined by 0.18% m/m, lending credence to the idea that underlying price pressures – particularly outside energy – are easing. However, the Superscore increased by 3.14% on a year-over-year basis, suggesting that progress remains uneven. Meanwhile, real weekly earnings fell 0.9%, reversing previous gains and pointing to some pressure on consumers.
Overall, the report reflects a divided narrative: A rise in headline inflation driven by energy shocks, coupled with a soft core backdrop, should provide some comfort to policymakers. The market reaction saw only minor weakness in the USD which quickly subsided, with Fed pricing still indicating no rate change this year. The key question going forward is whether energy-driven growth spills over into broader inflation or proves temporary as geopolitical tensions ease.
Later, a University of Michigan report on consumer confidence came back very weak (at a record low) due to the effects of the war and rising gasoline prices. The preliminary April consumer sentiment index fell sharply from 53.3 to 47.6, well below the 52.0 estimate and the lowest reading on record. The decline was widespread, with current conditions falling to 50.1 and expectations falling to 46.1, as consumers across all demographics reported worse views. The decline is largely linked to the Iran conflict and rising gasoline prices, which have risen from pre-war $2.89 to about $4.15 nationally, which is weighing heavily on personal finances, shopping conditions and perceptions of the overall economic outlook.
Inflation expectations also rose higher, adding to concerns. One-year expectations rose to 4.8% from 3.8%, the biggest monthly increase in a year, while five-year expectations rose to 3.4%. While long-term expectations remain relatively restrained, the sharp rise in short-term expectations highlights growing concern about near-term price pressures. Overall, while sentiment surveys can be volatile, the decline reflects a meaningful hit on consumer confidence driven by higher prices and uncertainty, with the potential for improvement if energy prices ease and geopolitical tensions ease.
North of the US border, Canada’s March employment report saw a modest improvement, with jobs increasing by 14.1K, broadly in line with expectations and a rebound from last month’s sharp -83.9K decline, while the unemployment rate remained steady at 6.7% (slightly better than expected at 6.8%). The gain was driven by part-time employment (+15.2K), while full-time jobs were little changed, indicating a labor market that is stabilizing but still lacks strong momentum. Sector data was mixed, with declines in finance and real estate offset by gains in “other services” and natural resources, while health care led job growth on a year-over-year basis and manufacturing lagged. Wage growth reached 4.7% year-on-year – the strongest since the end of 2024 – highlighting persistent inflation pressures despite soft hiring trends. At the regional level, results were uneven, with weakness in British Columbia and steady conditions in Ontario, while provinces such as Manitoba and Saskatchewan showed strength. Overall, the report suggests a labor market that is holding together after early-year weakness, with increased unemployment reflecting slower hiring rather than layoffs, and stronger wages taking into account inflation concerns.
Geopolitical developments in the Middle East this week were largely about the situation ahead of the upcoming ceasefire and peace talks between Iran and US representatives. The hopes are not for a comprehensive solution, but for incremental progress—namely, the reopening of the Strait of Hormuz. Following a 14-day ceasefire declared late Tuesday, a limited number of ships briefly transited the strait, but renewed Israeli attacks on Hezbollah in Lebanon led to another shutdown. However, Israel now appears to be on board with the ceasefire framework, which should help pave the way for this weekend’s talks and raise cautious optimism for progress.
Markets reacted positively to the de-escalation tone, especially after President Trump walked back earlier rhetoric about “total destruction” in his Easter Sunday message. US stocks rose strongly this week, with the S&P 500 up nearly 4% and the Nasdaq rising 4.68%. Oil prices reflected the decline on supply fears, falling about 15% as traders anticipated the possibility of an improvement in flows through the strait.
In FX, the USD broadly weakened with most major currencies gaining: EUR +1.82%, GBP +2.04%, CHF +1.38%, CAD +0.69%, AUD +2.53%, and NZD +2.69%, while the JPY was the only exception, falling -0.16% against the Dollar. Overall, the tone turned towards cautious optimism, with the market leaning on the idea that tensions could ease, even if only slowly.
As we enter the new week, much will depend on the weekend’s news and hopes for more peace talks along the Strait of Hormuz. If this could be done, it would be a step towards lower oil prices and, hopefully, a lower potential inflationary environment.
