Ceasefire Shifts Markets Toward Rate-Cut Expectations

 Traders are now exploring the possibility of an interest rate cut by the end of the year, following the U.S.-Iran cease-fire agreement. This morning, the odds of a reduction jumped to about 43%, and market pricing is implying a 3.5% rate for the overnight borrowing benchmark, compared to the current effective level of 3.64%. Before this announcement, the market implied a 14% likelihood of cuts.  Traders were expecting the Fed to be hesitant this year as the Iran conflict had sent energy prices through the roof. This threatens the central bank's efforts to get inflation back to 2% before the conflict in Iran markets had expected multiple Cuts this year in an effort to shore up the plodding labor market. The market is now just pricing in a clear skew toward one cut from the Fed this year. This week, the US market will receive data that offers two perspectives on inflation. The first one, this Thursday, the Commerce Department will release the Personal Consumption Expenditures Price Index. This will show where inflation stood in February prior to the Middle East War. On Friday, the Bureau of Labor Statistics will release the Consumer Price Index for March, which will reflect the price impact from the hostilities. Economists expect the PCE report to show headline inflation at 3% and core inflation. This excludes food and energy, which is at 2.8%. For the CPI, the expected readings for March are pegged at 3.3% and 2.7%. With all items reflecting the war-induced price increases. However, the Fed expects generally cautious tones from policymakers in the coming months.