Markets got a brief respite from the headlines from the Middle East with the release of the Michigan CPI and Consumer Confidence Index.
The latest US CPI report showed a sharp acceleration in headlines driven primarily by energy, while underlying inflation trends remained relatively under control. The headline CPI rose 0.9% month-on-month, in line with expectations but well above the previous reading of 0.3%, raising the annual pace from 2.4%. The rise was almost entirely due to energy, with the index rising 10.2% and gasoline prices jumping more than 21% during the month as geopolitical tensions pushed crude oil prices higher. Importantly, gasoline prices remain approximately 40% higher than pre-war levels, suggesting that there could be additional pressure on pipelines in the near term – although this is likely to reverse over time if a sustained ceasefire holds.
Beneath the surface, core inflation data was more encouraging. Core CPI rose 0.2% m/m for the second month in a row, well below the 0.9% expected, with an annual rate of 2.6% versus 2.7% expected. The super index also fell to 0.18% m/m, reinforcing the view that underlying price pressures – especially outside energy – are moderating. However, the year-on-year super-core rate rose to 3.14%, highlighting that progress remains uneven. Meanwhile, real weekly earnings fell 0.9%, reversing earlier gains and indicating some pressure on consumers.
Overall, the report reflects a divided narrative: higher headline inflation driven by energy shocks, coupled with a softer fundamental backdrop that should provide some relief to policymakers. The market reaction saw only modest weakness in the US dollar which quickly faded, with the Fed’s pricing continuing to point to no movement in interest rates this year. The key question going forward is whether the energy-driven rise will spill over into broader inflation or will be temporary if geopolitical tensions subside.
Later, a University of Michigan report on consumer confidence was much weaker (at record low levels) due to the spillover effect of the war and higher gasoline prices. The preliminary consumer confidence index for April fell sharply to 47.6 from 53.3, well below the estimate of 52.0 and representing the lowest reading on record. The decline was broad-based, with current conditions falling to 50.1 and expectations falling to 46.1, as consumers across all demographics reported deteriorating views. This deterioration is largely related to the Iranian conflict and rising gasoline prices, which have jumped to about $4.15 nationally from $2.89 before the war, significantly impacting perceptions of personal finance, purchasing terms, and the general economic outlook.
Inflation expectations also rose, adding to concerns. The one-year forecast rose to 4.8% from 3.8%, the largest monthly increase in a year, while the five-year forecast rose to 3.4%. Although long-term forecasts remain relatively limited, the sharp rise in short-term forecasts highlights growing concern about near-term price pressures. Overall, while polls can be fickle, the decline reflects a strong hit to consumer confidence driven by rising prices and uncertainty, with the potential to improve if energy prices decline and geopolitical tensions ease.
North of the US border, Canada’s March employment report showed modest improvement, with payrolls rising by 14.1K, roughly in line with expectations and a rebound from the sharp decline of -83.9K the previous month, while the unemployment rate remained steady at 6.7% (slightly better than the 6.8% expected). The gains were driven by part-time hiring (+15.2K), while full-time jobs were little changed, suggesting the labor market has stabilized but still lacks strong momentum. Sector data was mixed, with gains in “other services” and natural resources offset by declines in finance and real estate, while healthcare led job growth and manufacturing lagged year-over-year. Wage growth rose to 4.7% year-on-year, the strongest since late 2024, highlighting persistent inflation pressures despite weak employment trends. Regionally, results were mixed, with weakness in British Columbia and stable conditions in Ontario, while provinces such as Manitoba and Saskatchewan showed strength. Overall, the report points to a consolidation in the labor market after weakness early in the year, with rising unemployment rates reflecting a slowdown in hiring rather than layoffs, and steady wages keeping inflation concerns at bay.
Geopolitical developments in the Middle East this week were largely about positioning ahead of the upcoming ceasefire and peace talks between Iran and US delegates. The expectation is not a comprehensive solution, but rather incremental progress – specifically, the reopening of the Strait of Hormuz. Following the 14-day truce announced late Tuesday, a limited number of ships briefly transited the strait, but renewed Israeli strikes on Hezbollah in Lebanon led to another closure. However, Israel now appears to be in line with the ceasefire framework, helping to pave the way for this weekend’s negotiations and raising cautious optimism about progress.
Markets responded positively to the de-escalation tone, especially after President Trump backed away from his previous rhetoric of “total annihilation” in his Easter message. US stocks rose strongly, with the S&P 500 rising nearly 4% and the Nasdaq gaining 4.68% during the week. Oil prices reflected easing supply concerns, falling nearly 15% as traders appreciated the potential for improved flow through the strait.
In the FX market, the US dollar weakened broadly, with gains in most major currencies: Euro +1.82%, British Pound +2.04%, Swiss Franc +1.38%, Canadian Dollar +0.69%, Australian Dollar +2.53%, and New Zealand Dollar +2.69%, while the Japanese Yen was the only exception, falling modestly by -0.16% against the Dollar. Overall, the tone has shifted toward cautious optimism, with markets leaning into the idea that tensions may ease, even if only gradually.
As we enter the new week, much will depend on the weekend’s news and hopes for further peace talks with the opening of the Strait of Hormuz. If this can be done, it would be a step towards lower oil prices and with hopes, a potentially lower inflation environment.
