Equity markets rebounded Monday as reports emerged that Iran’s Ministry of Intelligence signaled openness to talks with the U.S. Central Intelligence Agency regarding a potential de-escalation of conflict, according to a report in the New York Times citing briefed officials. The development offered a temporary reprieve from concerns that escalating tensions in the Middle East would further disrupt global energy supplies and delay anticipated interest rate cuts by the Federal Reserve.
The Dow Jones Industrial Average trimmed losses from roughly 1,000 points to close down 363 points, while broader equity indexes also recovered ground. Sentiment was further bolstered by comments from former President Trump, who stated the U.S. Had significantly degraded Iranian military capabilities and announced measures to stabilize energy markets, including political risk insurance and financial guarantees for maritime trade in the Gulf through the U.S. International Development Finance Corporation. Trump also indicated the U.S. Navy could escort oil tankers through the Strait of Hormuz if necessary.
Despite the improved sentiment, underlying economic data continued to present a mixed picture. The Institute for Supply Management’s (ISM) manufacturing PMI rose to 52.4 in February, exceeding forecasts and marking a second consecutive month of expansion. Yet, the report also revealed a significant surge in price pressures, with the prices-paid index jumping to 70.5 from 59, its highest level since June 2022. This increase in manufacturing costs is fueling concerns about persistent inflation.
Treasury yields moved higher across the curve following the ISM data and the news regarding potential talks between Iran and the U.S., as investors reassessed the outlook for monetary policy. The conflict has fueled concerns that rising energy prices could keep inflation elevated and delay Federal Reserve easing. Markets have trimmed near-term easing expectations, with the probability of a June rate cut falling to roughly 39%, down from above 50% previously.
The U.S. Dollar index fell 0.23% to 98.82, pressured by the reports of potential dialogue, but remained above its 18-day moving average of 97.51. The euro rose 0.21% to $1.1637, recovering from an earlier low since November, while the Japanese yen gained 0.26% to 157.34 as energy prices stabilized. Sterling was little changed against the dollar at $1.3360. The Australian dollar rose 0.33% to $0.7058 following stronger-than-expected fourth-quarter economic growth data, expanding 0.8% and lifting annual growth to 2.6%, the fastest pace since 2023.
Looking ahead, market focus will shift to the ISM services PMI reading later this morning for further signals on economic momentum and price pressures in the services industry. Friday’s jobs report will also be closely watched for indications of labor market resilience and its potential impact on the Federal Reserve’s policy path. Kansas City Fed President Jeffrey Schmid reiterated his opposition to additional rate cuts, arguing that inflation remains too elevated. Minneapolis Fed President Neel Kashkari acknowledged the Iran conflict introduced uncertainty, noting the duration and magnitude of the shock will determine whether easing remains appropriate. New York Fed President John Williams said it is too early to assess the inflation impact of the conflict.
Bank of Japan Governor Kazuo Ueda warned that the Middle East conflict could significantly affect Japan’s economy, signaling the central bank is likely to keep rates steady. Meanwhile, Reserve Bank of Australia Governor Michele Bullock said the March meeting would be “live” for a potential rate increase, marking a shift from her recent patient tone.