Trading Desk Talk

Still Water Runs the Deepest

Markets exhaled last week after a ceasefire was reached just moments before the deadline, set by President Trump for 8 p.m. Eastern on Wednesday. Investors were on edge due to the extremely heated rhetoric from Trump regarding the future of Iranian civilization. Thanks to the ceasefire, the Move Index, which gauges U.S. bond market volatility, declined well off the highs of March (Figure 1). Despite the tenuous accord, the U.S./Israel and Iran appear to be far apart in negotiations on a permanent truce.

Country superstars Merle Haggard and Willie Nelson are known for their preference for “peace,” but they sang with a less conciliatory tone in their 1983 tune, “still water runs the deepest, like a love complete and through, so peaceful and dependable, I can’t say the same about you.” These lyrics were, perhaps, a nod to today’s fractures between Tehran and Washington and the still waters lining the once busy Strait of Hormuz. While the strait is officially open again, in practice it remains closed, as reported violations of the ceasefire deter shipowners from using the waterway.

Facing pressure from the White House to lower rates, the Federal Open Market Committee was already in a difficult spot. That spot became even more uncomfortable as the crosscurrents from the economic landscape grew more opaque. For example, figures released from the Bureau of Labor Statistics at the beginning of April signaled renewed vigor in the labor market, somewhat bucking the recent trend that pointed to slower job creation. Tangentially, the Bureau of Economic Analysis released the Personal Consumption Expenditures Index last Thursday, which suggested a slight uptick in February inflationary pressures, from 0.3% to 0.4% on a monthly basis.

According to the minutes of the FOMC meeting on March 18, “Some participants judged that there was a strong case for a two-sided description of the Committee’s future interest rate decisions in the post-meeting statement.” Recall that the January FOMC statement said that “several” participants supported such a two-sided description. The upgrade from “several” to “some” offers a hawkish undertone to the Fed’s guidance. Still, we note that “most” were worried about the dovish risks, whereas “many” were worried about the hawkish risks. This skew makes sense, given that the Federal Reserve’s latest dot plot retained the broader rate-cutting bias for 2026 and 2027. As Mizuho Securities pointed out (Figure 2), the FOMC is now a bit more balanced between hawks and doves.

The two factions that divide the Fed each have legitimate claims to their position. Start with the risks emphasized by the doves. “[M]ost participants raised the concern that a protracted conflict in the Middle East could lead to a further softening in labor market conditions, which could warrant additional rate cuts, as substantially higher oil prices could reduce households’ purchasing power, tighten financial conditions, and reduce growth abroad.”

Next, consider the risks emphasized by the hawks. “Many participants pointed to the risk of inflation remaining elevated for longer than expected amid a persistent increase in oil prices, which could call for rate increases to help bring inflation down to the Committee’s 2 percent objective and keep longer-term inflation expectations firmly anchored.”

In our view, the near-term risks seem to favor the hawks. Labor figures came in strong for March, with the BLS suggesting a gain of 178,000 jobs. The gains were broad-based, too: All sectors grew, sans finance and government. Inflation, on the other hand, is going the wrong way; core PCE has picked up in 2026 (turquoise line in Figure 3), with a notable jump in February prices for durable and non-durable goods.

The historic surge in energy prices last month was definitely reflected in Friday’s Consumer Price Index release: The headline figure was up 0.9% in March, month over month, compared to just a 0.3% increase in February. The 0.9% increase marked the fastest monthly pace since June 2022. The CPI release noted that, “The index for energy rose 10.9 percent in March, led by a 21.2-percent increase in the index for gasoline which accounted for nearly three quarters of the monthly all items increase.” Meanwhile, the energy price gain was the largest monthly jump since 2005. And the monthly surge in gasoline was the largest increase since 1967.

Year over year, the headline CPI figure was up 3.3%, versus 2.4% in February. The core figure, which excludes food and energy, increased at a slower pace of 0.2%, month over month, matching February’s increase. Year over year, core CPI rose 2.6%, versus 2.5% in February. Given the extreme volatility in energy costs, Fed officials will probably focus on the core figures as a better way to view consumer price gains in the near term. In short, against today’s backdrop of rising inflation and a labor market that isn’t showing widespread signs of weakness, the Fed will likely pursue a wait-and-see approach to cuts.

“So peaceful and dependable,” Haggard and Nelson sang, before adding, “I can’t say the same about you.” Washington and Tehran may have reached a ceasefire, but markets will be on edge to see if it holds.

FROM THE DESK

Agency CMBS — Fannie Mae new issue volumes were muted for the week, with only about $400 million out to bid and spreads were mixed. Freddie Mac issuance saved the agency space last week, with about $2.5 billion of participation certificates and new K-deals. Ginnie Mae volumes increased in the latter half of the week and spreads tightened three to four basis points (bps) by week’s end.

Municipals — AAA tax-exempt yields moved lower across the curve, week over week. Maturities in the middle of the curve benefitted the most (down about 15 bps), while the short end was around 10 bps lower and the 30-year benchmark was 13 bps lower during the week. About $8.8 billion of new tax-exempt issues came to market last week. Next week’s tax-exempt calendar shows about $11 billion of new issuance. New issues can receive a lukewarm reception this time of year, as investors withdraw funds to pay the tax man.

The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.