•Meanwhile in markets, with the 14-day truce in the Iran war quite literally hanging by a thread, yesterday’s relief rally remains largely intact. Punters correctly reason that it won’t be smooth sailing, and that there definitely are going to be ups and downs;

•If you believed that maintaining a cease fire would be easy, given the mutual animosity between the warring sides (animosity that spans decades), and in particular what has transpired since the 12-day war last year, I have this bridge to sell you. In any case, I am a glass is half full type. The shooting war between the US and Israel and Iran has stopped. What has not stopped, are Iranian attacks on the Gulf states (took place yesterday, but have not seen a repeat yet today), and the aforementioned Israeli attacks in South Lebanon. Call it two steps forward, one step back;

•More importantly, President Trump owns this thing – this thing being the Strait of Hormuz. He can’t just walk away (if he could, he would), nor has he been able to ‘bomb open’ the Strait. He has been begging other countries to help him, but I assume most of them wisely tell him to make peace with the Iranians.  Which leaves Trump with only one option: talks with Tehran;

•Secondly, in Israel the opposition, smelling blood (Netanyahu’s) have called the war an abject strategic failure. That doesn’t sound like full-throated support to resume the fighting to me. Nethanyahu, fighting for his political life, could always double down. But it seems to me he will be on his own, quite literally;

•The biggest problem for the cease fire right now are Israel’s attacks on South Lebanon, which Iran says is a gross violation of the deal that was struck a day and a half ago. Iran said that Lebanon is included in the truce, but both President Trump and Vice President Vance have said that Lebanon wasn’t part of the agreement. But if you listen to Vance, he leaves open the option to pressure the Israelis to cease their strikes;

•So, I am quite optimistic that the truce will be on more solid footing in the next days and weeks. But it will be a bumpy process. And there’s always the risk of another cliffhanger event – like Trump’s apocalyptic off-the-rails threat to nuke the Iranians;

•Markets are less sanguine, but the damage is still contained. Brent crude futures are up about 8% from yesterday’s lows and at $97.5 we’re awfully close to the psychological level of $100. But at the same time, ways below the pre-truce level of about $111 a barrel. Bund yields are up 3-9bps across a bear flattening curve. We’re still closer to Wednesday’s lows than the pre-truce levels, it must be emphasized. Peripheral spreads, which narrowed strongly on dovish ECB-speak that cast an April hike in doubt and then on the truce, are up several bps. US Treasury yields are broadly tracking Bunds. European stocks are down but the losses are – there’s that word again – contained. I clock the Stoxx 50 0.9% lower at 5,862.42, which is just north of the 50-DMA and 100-DMA. S&P 500 futures are about 0.7% below yesterday’s relief rally high;

•Elsewhere, ECB rate hike pricing has finally come down back to earth. For the year, 50bps in hikes are now priced in, down from 75bps weeks ago. That’s in line with my models when taking into account the ECB’s past reaction function and an aggressive assumption of core inflation rising to three percent;

•For the April ECB, 8bps of hikes are priced in. That must go to zero – even the hawks prefer to wait for June to decide on rates;

•In currency space the HUF rally has petered out. In the past weeks HUF rallied another five percent versus the euro on expectations that the opposition will beat Prime Minister Orban in the polls this weekend and successfully unseat Europe’s Enfant Terrible. At 378, EURHUF is one percent off its low. Mind you that polls suggest a comfortable victory for the opposition Tisza party;

•Looking ahead, we have some second-tier economic data on tap: US jobless claims and PCE inflation for February (so, stale). Thus, we’ll be eyeing the latest Iran headlines – especially the US-Iran talks in Islamabad tomorrow – plus tomorrow’s US CPI release for March, which should show some of the war’s inflationary impact.

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