• Meanwhile in markets, ECB and Fed rate hike pricing is in full-blown retreat. As a matter of fact, we’re approaching that grey area where a second hike has almost become a coin toss in the case of both central banks;

• To be precise, the USD OIS forward curve prices in 39bps of hikes at the peak, which is nine months out. With forwards peaking at 4.01, rate hike pricing is a good 15bps or so below the post June FOMC meeting peak;

• While forward pricing might correctly reflect the odds of one or a couple of Fed rate hikes, current forward pricing will logically never be realized. The Fed won’t do a hike and a hike and a half. But that’s beside the point. The Fed doing a single quarter point hike makes no sense either, given Chairman Warsh’s tirade against inflation at his first presser two weeks ago. A ‘one and done’ after five years of above target inflation? I think not;

• The case for multiple hikes isn’t exactly strong either these days. With the rapid decline in Treasury breakeven rates and inflation-linked swap rates, it makes less and less sense for the Fed to contemplate even a single hike. Take the 2y breakeven, which has plunged to just below two percent, a decline of about 150bps from the April peak. Breakeven rates across the curve have retreated to pre-war levels. One could argue that breakevens reflect some Fed tightening. Then again: Fed rate hike pricing has been in retreat for more than a week while at the same time breakeven rates fell – and fell some more;

• Long story short, the Fed will either hold or hike just a couple of times. The way inflation fears are deflating suggests that odds of not even a single hike this year should increase;

• Turning to the ECB, forwards have basically priced out any odds of a third quarter point hike. More importantly, pricing of a September quarter point hike has retreated to about 15bps priced in. If the ECB is going to hike again, it will be in September. Not earlier, and certainly not later. The underlying assumption being that the US-Iran deal will hold, and that we won’t go back to war – instead the gradual return to ‘normal’ in the Strait o Hormuz;

• And speaking of the ECB, hawkish ECB-speakers are starting to hedge their bets – sort off. Governing Council member Martins Kazaks, who heads the Latvian central bank, told Econostream this morning that there is no urgent need to hike again and that the ECB once again has the “luxury to wait and see.” If I extrapolate Kazaks remarks, the July Governing Council meeting will be ‘neutral’. Neutral in the sense that the ECB will no longer obviously lean towards another hike. Instead, Lagarde & Co will show no preference for a hike or a hold in September;

• Board Member Schnabel repeated her call for another hike over the weekend. But at the same time, she started to hedge her bets a bit by citing the US-and Iran peace deal as a factor of importance. Still, she downplayed the impact of the deal by claiming that oil prices are likely to stay persistently higher because of the slow opening of the Strait of Hormuz. That’s a rather tone-deaf remark. Oil prices have literally taken the plunge to pre-war levels on the back of an only feeble recovery in Strait ship transits;

• As a veteran ECB watcher (read: a guy who spent too much time on the ECB), I am seriously considering scrapping my call for a hike in September. What holds me back the most is that the ECB has a penchant for raising rates to a ‘nice round number.’ In September 2023, there was no economic justification for a hike to 4.00 percent. But the ECB proceeded regardless because they just didn’t like 3.75 percent. Central bankers are no different than us lowly punters, with our 50-, 100-, and 200-DMAs. Nice round numbers. And thus, completely arbitrary;

• Turning to some broader market commentary, European equities aren’t moving much this morning. US equity futures are up modestly but also fail to register meaningful gains. Bund yields are flat for the day, as are US Treasury yields;

• Brent crude futures prices have ticked up a bit this morning but are still comfortably low at just below $73 a barrel. Remarkably, Brent crude futures have taken the US-Iran skirmishes over the past several days in stride. Starting on Thursday, there have been tit-for-tat choreographed attacks. But punters don’t seem to care very much, reasoning that the path of the least resistance is for the truce to hold;

• Looking ahead, the calendar for today is void of anything of remote importance. Focus will be on a host of ECB-speak at the central bank’s annual forum in Sintra, Portugal this week, starting tomorrow. Fed Chairman Warsh is also scheduled to attend the ECB’s version of Jackson Hole. The Bloomberg calendar even has a speaking slot for Warsh on Wednesday. Let’s see how Warsh plays intermeeting talking to the market. Finally, eyes will also be on Thursday’s US payrolls and unemployment figures release.

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