Three months ago, bond traders were pricing in two Fed rate cuts. They are now pricing in a hike.
The Iran war is what flipped the script.
Fed funds futures show traders pricing in roughly 50 percent odds that the Fed will lift rates by its December meeting. Other gauges put the odds of higher rates by year end at closer to 70 percent.
Three months ago, the same markets were pricing in two quarter-point cuts this year.
The Iran war started on February 28, when the U.S. and Israel hit Iran. Since then, markets have moved fast.
The driver is simple. Oil near 105 dollars a barrel is reheating prices.
The job market is also still adding workers each month. That mix does not give the Fed an easy reason to cut.
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Look at the bond market for the clearest signal. The 10-year Treasury yield is the rate the U.S. pays to borrow for a decade. It hit a 16-month high this week.
The 30-year yield crossed 5 percent for the first time since 2007. Higher yields mean bond buyers want more pay to hold government debt.
That is usually a sign they expect more price gains, more rate hikes, or both.
The repricing lines up with what JPMorgan's Jamie Dimon said this week. He warned that rates could go much higher from here.
Dimon runs the largest U.S. bank, and his calls move markets.
President Trump told Fortune in an interview this week that rate cuts may have to wait. He said the Iran war has to wrap up first.
That was a shift in tone from his prior push for fast cuts.
Trump named Kevin Warsh to be the new Fed chair. Warsh now has a tough first call.
The market does not expect a cut at his first meeting. Investors think the most likely outcome in June is no change at all.
By the end of the year, traders see better than even odds that rates end up above where they sit today. That is a hawkish bet for a chair the White House picked to push for cuts.
Inflation data is the next big test. The May print will land in mid-June.
If it comes in hot, the case for a hike grows. If it cools, the cut path comes back into play.
A second factor is oil. If a deal with Iran sticks, crude can drop fast.
That would take some heat out of the price story. It would also give the Fed more room to ease.
A third factor is the job market. The next jobs print will land in early June.
A weak number could push the case for a cut. A strong number locks in the hawk view.
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