Global stocks and bonds surged Monday after the United States halted its bombing campaign against Iran, sending oil prices sharply lower and easing fears about inflation ahead of a critical week for central bank decisions.
U.S. President Donald Trump stopped a two-week bombing campaign against Iran, with U.S. officials reportedly concerned over the depletion of air defense weapons. Iran said it would pause its own attacks for as long as the U.S. holds fire.
The lull in fighting over the Strait of Hormuz drove Brent crude down 7.8% to $89.41 a barrel. U.S. crude dropped nearly 7% to $83.20. Europe's STOXX 600 climbed 0.9%, closing in on early July's all-time highs. Economically sensitive retail and travel stocks rallied more than 2%, though a drop in oil stocks weighed on the broader market. S&P 500 futures rose 0.9% and Nasdaq futures jumped 1.4%, setting up Wall Street for an upbeat start, according to a Reuters report.
The pullback in oil helped 10-year Treasury yields fall 4.3 basis points to 4.64% on Monday, moving further below last week's 18-month high. The move was on track to be the largest one-day decline in Treasury yields since June 24. European government bond yields also fell across the board.
Most major currencies advanced against the dollar as traders pared back the probability of rate hikes from the Federal Reserve. The euro edged up 0.2% to $1.139, and the dollar dipped 0.2% against the yen to 163.64.
The Federal Reserve is set to announce its interest rate decision on Wednesday. Market pricing places roughly a one-in-three chance of a rate increase, though most analysts doubt Fed Chair Kevin Warsh would support such a move. The Bank of England will announce its decision Thursday, and the Bank of Japan on Friday. Both are expected to hold steady.
The Fed has kept rates elevated as it works through an inflation picture that has remained above its 2% target since 2021. The consumer price index posted an unexpected decline last month, bringing the annual inflation rate down to 3.5% in June. But oil prices jumped again in the weeks that followed as conflict escalated in the Middle East, complicating the outlook.
Samy Chaar, chief economist at Lombard Odier, said that since the last FOMC meeting, conditions had calmed. "Since the last FOMC meeting, inflation, labour market and consumption data have all been sufficiently comfortable to prevent the need for aggressive hiking. What was also a source of comfort was that the oil price was closer to $70 than $100," he said. Chaar added that the still-elevated oil price gives hawks at the Fed an opening to push for rate hikes. "But we're not there yet. I think it depends on how long the tensions in the Middle East persist," he said.
The Fed's benchmark rate shapes borrowing costs across the economy. When the Fed raises its rate, banks charge more for loans, which can slow economic activity and ease inflation. According to CNBC, the benchmark feeds into the prime rate, which is typically 3 percentage points above the federal funds rate, and that in turn affects auto loans, credit cards, and other short-term debt.
Brett House, an economics professor at Columbia Business School, said the situation puts the Fed at odds with the White House. "It sets up a potential conflict between Trump and the Fed, where his desire for lower interest rates is unlikely to be realized anytime soon," he said.
Mortgage rates have remained just above 6.50%. Jeff DerGurahian, LoanDepot's chief investment officer and head economist, said that "encouraging inflation data is being offset by higher oil prices and renewed tensions between the U.S. and Iran." House noted that bond markets also play a major role in what consumers ultimately pay. "Consumers need to remember that the rates that they face are not set only by the Fed. The bond market has a big hand in determining the rates consumers pay," he said. He added that elevated Treasury yields "are going to keep borrowing costs higher for consumers both on short-term borrowing and the longer-run loans."
About one-third of S&P 500 companies report earnings results this week, with profits on track to show a 26.5% increase over last year, according to LSEG IBES data. The Fed's Wednesday announcement will come in the middle of that reporting stretch.
