• Meanwhile in markets, if you’re a technical chart watcher, eat your heart out. Brent crude futures prices are experiencing gravity and at just below $80 a barrel are finding support at the 200-DMA;

• Since last Thursday’s Iran deal headlines Brent futures prices have fallen a massive 17 percent. Prices are close to pre-war levels of around $70 a barrel. Comparatively speaking, the decline in bond yields has been much less pronounced. Since last Thursday, 10y Bund and US Treasury yields are down about 15bps. More importantly, UST yields remain elevated across the curve compared to pre-war levels. 10y and 30y Bund yields have fully erased the war-induced spike. But the same cannot be said about the 2y, which is closer to this year’s highs than pre-war levels;

• The underperformance of short end Bunds is understandable. Since last week’s Governing Council meeting, ECB-speakers have doubled down on rate hikes. Puzzlingly, on Monday President Lagarde even spoke of so-called ‘second round effects’ having emerged (inflation that begets inflation, key of which is often higher wage growth). While the hawkish Bundesbank President Nagel corrected Lagarde later that day (Nagel spoke of only risks of second round effects), Lagarde’s waffling underscores the ECB’s nervousness. Our central bank overlords are PTSD-scarred by pandemic era inflation, which increased the price level by twenty to twenty five percent. Markets duly price in another hike in September, though nowadays a firm hold next month;

• The problem for both the bond market and the ECB are market-based measures of inflation expectations. Our favorite measure, the 1y1y forward inflation-linked swap rate, has barely retraced half the war-indued spike. Then again, the forward rate at 2.1 percent isn’t exactly screaming red hot inflation about to hit us in the face;

• What matters for the bond and inflation-linked swap market is the price of oil. Of course, the relationship between the two goes without saying. But for our mechanically minded ECB overlords, the price of oil and natural gas is really crucial. Take the latest ECB staff forecasts. As I understand it, in the baseline scenario staff assume an average Brent price of $97 a barrel this year. If I average YTD daily settlements of the nearest-dated Brent crude future, I arrive at $88 a barrel. Same story for natural gas futures prices: YTD average of 41.28 euros per megawatt hour, which compares with staff forecasts of 45.6 euros;

• As an ECB-watcher, my takeaway from post-Iran war deal pricing behavior in the oil market is that the risks for the next ECB hike are to the downside. July will be a hold – the deal has removed the urgency of a cut (and yes, I am still optimistic about the deal holding – quite simply because President Trump wants to move on). By September – ages away as far as markets are concerned – the whole Strait of Hormuz episode is likely to be in the market’s rearview mirror. With markets reasoning that Trump has no interest in stirring the hornet’s nest again months before the mid-terms. If oil prices only stay around current levels – which is absolutely not the end of the world considering pre-war prices, the ECB will be cutting its inflation forecasts next time. The wildcard is natural gas futures prices, which have staged much less of a decline than oil prices. That puts a hike in September in balance. A downgrade from the certainty we have now;

• Turning to some market commentary, US Treasury have barely budged today ahead of the first FOMC meeting led by new Fed Chairman Warsh. Fed rates pricing remains static at one hike priced in. European equities are consolidating their recent Iran deal-induced gains. So, trading flat. S&P 500 futures aren’t doing much either. The broad dollar is lower. But in the greater scheme of things, the deal-induced declines are relatively modest;

• We’re keeping close tabs on Bund spreads, with Italy now trading at about the same level as France. Unjustified in our view. Within the EU, France and Germany are still the only two BSDs. France’s deficit is clearly in a bad place while Italy’s isn’t. But France’s credit rating is higher, its debt load is lower, and its economy is stronger. To me, this state of affairs suggests that punters could be fretting already about next year’s political risks, that are the Presidential elections;

• Looking ahead, besides the Fed we have US retail sales on the calendar to look forward to.

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