1. Four weeks into the Iran conflict and things are escalating. The Houthis entered the war over the weekend, firing a ballistic missile at Israel for the first time since Operation Epic Fury began, with severe implications for Red Sea and Bab al-Mandeb shipping if they step up involvement. U.S. troops were injured in an attack on a Saudi air base and GCC diplomacy in Pakistan has yielded nothing. Open-source military tracking shows a 65% surge in U.S. airlift tempo over five days, with special operations assets flowing into staging positions across Israel, Jordan, Greece and at sea. The activation of heavy sealift from Diego Garcia suggests preparation for something beyond a limited strike. The consensus for a quick resolution has been abandoned entirely.

2. The market is going through a regime shift. For three weeks the repricing was concentrated in front-end rates as the market focused on the inflation impulse. ECB pricing reached 29 basis points of hikes, UK priced roughly 90 basis points cumulative for the year and the U.S. priced close to a full hike. Friday marked what I think is a genuine inflection. Curves twist steepened aggressively, with 2s10s now steepening while break-evens invert. The market is pivoting from inflation shock to growth shock. We thought this rotation would happen sooner, but it is now underway. Cumulative moves since end-February are roughly 75 basis points across the USD curve, around 100 in EUR and well beyond that in GBP.

3. The front-end vol repricing is more technical than fundamental. A large amount of June SOFR put open interest was built around “Fed on hold” strikes and as futures sold off through them, those structures became trapped. Hedging demand keeps pushing further down the strike ladder, so downside vols are exploding beyond what the rates move alone would justify. I think the front end has enough in it. If things deteriorate further, the pain shifts to the belly and duration where people are still long and risk remains hidden. Both sides of the distribution are wide open. If data rolls over and the war prolongs, cuts come back into pricing that has almost entirely removed them.

4. Central banks are pushing back. Lagarde, Wunsch and Villeroy at the ECB have kept April open. Schnabel called for caution on Friday. Greene and Breeden at the Bank of England have sounded similarly cautious. Financial conditions have tightened sharply, with UK mortgage rates jumping from 4.9% to 5.5% in March as sub-4% deals vanished, and U.S. 30-year rates back above 6.6%. Much of the repricing in U.S. rates appears driven by systematic flows and broad-based stop outs across the market rather than fundamental investors, which matters for how quickly it can reverse.

5. The 1970s comparison has elements worth taking seriously. The second oil shock forced a reset in yields and term premia because central banks had eased too early after the first. Today, they never truly got inflation under control before this conflict arrived. U.S. import prices have jumped near post-pandemic peaks, UK inflation expectations have surged, and Japan printed a third strong wage round. If this becomes a catalyst for structural repricing of term premia alongside a policy mix skewing fiscal-loose and monetary-cautious, the long end of G10 curves has room to move. Cross-asset implied volatility has now surpassed the Liberation Day peak, which gives you a sense of how dislocated things have become. My sense is steeper curves from here rather than continued bear flattening.

6. The comparison with the 2022 Russia/Ukraine shock matters because the backdrop is fundamentally different. Then, we were emerging from extraordinary Covid-era stimulus with record central bank balance sheets, the ECB still buying assets and the Fed at all-time highs. Supply shocks were offset by enormous demand-side support from both monetary and fiscal policy. Today the ECB is actively shrinking its portfolio, the Fed’s balance sheet is near scarcity levels and growth was already softening. We entered this conflict without the cushion of ultra-easy policy, excess savings or fiscal largesse. If it continues, recession risk grows in a way it simply did not four years ago because there is no offsetting demand impulse. Friday may have been the inflection where the market started grasping this, and the logical conclusion is that central banks will eventually be forced to ease in the latter half of the year.

7. Oil sensitivity has diminished at the margin. Brent closed around $113 with the curve above $90 through September, but physical oils including Saudi, Omani and Dubai crude have compressed relative to exchange prices. The Houthis threatening Bab al-Mandeb could change that, but the marginal barrel is not moving prices as it was initially. The OECD projected U.S. inflation at 4.2% for the year, up from 3% pre-war. Given the weaker macro backdrop, broad-based inflation dynamics are hard to generate unless disruption extends well beyond energy. My sense is everyone is long oil as a hedge and while pre-war levels are unlikely given infrastructure damage, it is a consensus position.

8. Contagion into equities and credit is well underway. CDX IG has widened to the 67/68 area from low-to-mid 50s. The S&P is down 9% from February highs, P/E from 21x to 19x, and 10-year yields at 4.48% represent a 2 standard deviation one-month move that historically overwhelms equities. Growth expectations are being cut toward 2% with further downside if conditions do not ease.

9. Next week’s data is heavy. Non-farm payrolls on Friday is the main event. Our base case is 90 to 100k total with unemployment at 4.4%, above consensus of 60k. A strong print would largely reflect seasonal support and weather rebound rather than genuine hiring strength. A miss despite favourable seasonals would carry far more signal and force reassessment of the sideways labour market narrative. We also get global PMIs, the Tankan, German employment and March CPI for Tokyo, the Euro area, Switzerland and South Korea. Flash PMI price components are already at the highest since early 2023 and CPI has surprised to the upside in Brazil and Mexico. European inflation risk is tilted higher.

10. Asia looks increasingly exposed. KOSPI fell 6% on Monday and Korea has reversed roughly 70% of its year-to-date buying on the prime book. Grosses remain high but nets are low, meaning people are hedged but have not sold what they own. A less obvious risk is that the Strait of Hormuz is a major chokepoint for helium, a critical semiconductor manufacturing input. Prolonged disruption could impede chip production in Korea, Taiwan and the U.S. just as the AI capex cycle is being questioned. Fundamental equity businesses across the Street are still carrying significant gross and weakness is spreading into dividends, risk-arb and private credit.

11. The distribution of outcomes is exceptionally wide. We either head toward resolution with front-end rates rallying 100 basis points over six months and equities re-engaging with earnings, or toward a prolonged conflict with global shortages and further unwind. There is no middle ground where we keep chopping at these levels. The pain trade on payrolls is a strong number given short gamma, but a weak one reopens the cuts distribution. Both tails are fat and the weekend headlines reinforce that the left tail is not shrinking. The next week will tell us much more.

Macro Commentary Disclosure

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