Stock Market Surges on US, Iran Deal. Problem Solved? Not So Fast

Stocks cheered a breakthrough toward ending the US-Iran war, but the bond market refused to celebrate. Has the deal fixed the wrong problem?

• Equities, gold, and oil all showed relief, yet none broke the levels that have defined recent market turmoil
• Treasury bonds barely flinched — no rally, not even a token bounce — signaling the inflation threat is intact
• With the new Fed chair’s first meeting on deck, will policymakers confirm that a truce changes nothing on rates?

Financial markets are jubilant. After what feels like dozens of false starts, there is finally an apparent step toward ending the US-Iran war — an understanding between Washington and Tehran to reopen the Strait of Hormuz — and risk assets cheered. But the celebration is far from unanimous across markets, and the holdout is the one that matters most.

Everyone is celebrating except the bond market

The bellwether S&P 500 stormed higher, breaking above the bounds that had defined the recent selloff. Yet it closed below its record high, the critical level defining the downturn this month, and the rebound is coming on drastically fading volume — the same thinning participation that preceded the breakdown.

Crude oil pulled back as some geopolitical risk came off the table, but it held the wartime floor it established after the conflict began. Gold staged a potent bounce, only to stall at former support turned resistance without breaking back over; its sequence of lower highs and lower lows remains intact.

Then there are bonds — and here the story turns. Treasury prices did not merely rally weakly; they barely reacted at all, with not even a token wick above the range top that has capped them since mid-May. If a genuine de-escalation were resolving what truly ails markets, bonds might have been the first to unclench. They have not. The US dollar tells a similar tale, easing only modestly while holding the bounds of its six-week uptrend.

The deal fixed the missiles, not the inflation

The divergence makes sense once you ask which problem the deal actually solves. From the war’s outset, markets read it not as a “World War III” scenario but as an inflation shock: crude spiked, and that translated into weaker bonds, higher yields, a firmer dollar, and softer gold. The truce may genuinely lower the odds of missiles flying. It does little if anything for the inflationary impulse that was the real concern all along.

That impulse is already baked in. Reopening the Strait of Hormuz will take months in practice — the Red Sea offers a cautionary parallel, where shipping traffic still has not recovered nearly a year after a deal with the Houthis, because insurers and shippers remain skittish. More importantly, the energy shock has already seeped into core inflation. 

The latest consumer price index (CPI) data showed core services — the largest slice of inflation excluding energy — rising at its fastest year-on-year pace since the middle of last year as the energy shock spilled over into the broader cost structure. Producer prices (PPI) data told a similar story. That scarring will not heal in weeks or months; it is more likely a matter of quarters. The bond market, refusing to rally, is simply pricing what stocks are ignoring.

A central-bank week built around Wednesday

The week ahead splits into three: before Wednesday, Wednesday, and after. Ahead of the main event, the Bank of Japan (BOJ) is expected to hike for the first time since December, lifting rates to their highest since 1995, while the Reserve Bank of Australia (RBA) is seen pausing after three straight increases as its economy shows signs of wear — two very different responses to the same global pressure.

Wednesday brings the first Federal Reserve policy announcement under new chair Kevin Warsh. No rate change is expected, but the updated projections and the tone of the press conference are what matter, alongside a retail sales report that speaks directly to the embattled consumer. 

After Wednesday, the Bank of England (BOE) decides; no move is expected there either, but the hawkish camp is seen growing from one official favoring a hike to two — echoing the European Central Bank (ECB), which hiked last week despite a standstill economy. Tellingly, markets still price a roughly 75% cumulative chance of at least one Fed hike by December, peace deal notwithstanding.

Why the Fed won’t ride to the rescue

The bullish hope is that a truce paves the way for a friendlier rates backdrop. The Fed’s own projections argue otherwise. Its March forecasts, issued just after the war began, raised expectations for both output and inflation — and lifted the longer-run growth and interest-rate paths too.

That combination is the tell. If the uplift in inflation expectations reflected an energy shock, the Fed would have marked growth down, not up. Raising both says policymakers see price pressure that does not owe to the war at all.

That pressure traces to the fragile shape of US growth. First-quarter gross domestic product (GDP) recovered only about halfway from the slump amid the US government shutdown in the fourth quarter, and it did so because business investment — about 14% of the economy — grew at a blistering 10.4% annualized clip and out-contributed consumption, which is 68% of output and decelerated for a second straight quarter. Forcing a small share of the economy to grow so fast sends money churning at high velocity – that is what inflation is made of. The war did not create the problem; it compounded one already building.

So, when the Fed speaks Wednesday, the dovish pivot that traders may be counting on is unlikely to arrive. The last Fed meeting’s sharpest dissents came from members who wanted the easing bias removed from the policy statement, and nothing about a truce changes the inflation math. If bonds are right and stocks are wrong, this jubilant rebound is running on a misread, and the reckoning has merely been postponed.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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