By Molly Schwartz, cross-asset macro strategist at Rabobank

US Treasury yields have been falling for the past two days. On Monday, we saw US rates grind lower after Powell gave a speech at Harvard University where he seemed to hint that hikes were not part of the Fed’s plan for the immediate future, noting that “tariffs have a one-time impact on inflation” and that “there are risks to both sides of the mandate.” In times like these where inflation fears have been the headline, Powell’s refusal to doomspeak on the inflationary impacts of the war and elevated energy prices said enough on its own.

Powell also took time to talk about the continued issue of Fed independence, or lack thereof, highlighting how “there’s broad consensus” that the Fed requires independence on monetary policy. However, as we have noted previously, history suggests otherwise. The Fed was not independent from the Treasury until 1951 when the Treasury-Fed Accord was signed, and the Bank of England wasn’t formally independent until 1997.

But Powell has taken the issue of independence to heart, having announced that if he feels that Fed independence is at stake, and so long as the DoJ investigation continues, he will remain on the Board of Governors even after his term as Fed Chair ends, preventing Trump from appointing a third Governor to the Board this term.

However, the move lower yesterday was sparked after a Wall Street Journal article reported that “President Trump told aides he’s willing to end the US military campaign against Iran even if the Strait of Hormuz remains largely closed.” Should this statement hold water, this would bring a whole new meaning to the TACO trade. But, it appears more likely that it doesn’t, especially when this announcement was sprinkled between threats from the Administration to decimate Iranian desalination and energy infrastructure.

Yet, markets have returned to taking headlines as gospel and 2 year yields closed down more than 3bp yesterday. Meanwhile, whereas last Friday the OIS curve indicated investors were positioned for around 6bp worth of hikes from the Fed by 2026 year-end, yesterday they were positioned for 8bp worth of cuts. USD came under pressure due to the broad move in yields as the DXY Index closed down 0.65%, back below the 100-handle for the first time since Friday. USD weakness was especially visible against the euro, with EUR/USD closing the day up 0.80%, back to 1.15. We will also note that yesterday was the end of March and the end of Q1, so some of yesterday’s price action may also be a result of rebalancing flows.

What markets cared significantly less about was a new five point peace plan proposed by China and Pakistan. The plan includes talk of an immediate ceasefire and the reopening of the Strait of Hormuz. This is likely to go the same way as Iran’s proposed five point plan and the US’ fifteen point plan—nowhere at all. Markets were rocked, however, after a report circulated that Iranian President Pezeshkian stated that Iran was prepared to end the war if they “receive guarantees.” These guarantees, of course, are the same as the five point plan already proposed, and there was no confirmation that this announcement was a tangible indicator that the war will come to a close anytime soon, as FX and rates markets quickly retraced in response. The S&P 500, however, took that move and ran with it, jumping 1.16% to $6,515, and grinding above that level the rest of the US afternoon.

Trump’s focus, however, has shifted back to Europe. In a Truth Social post, Trump bemoaned Europe’s refusal to get involved, and has especially called out the UK’s Keir Starmer, saying that “all of those countries that can’t get jet fuel because of the Strait of Hormuz, like the United Kingdom, which refused to get involved in the decapitation of Iran, I have a suggestion for you…build up some delayed courage…and just TAKE IT…the USA won’t be there to help you anymore, just like you weren’t there for us. Iran has been, essentially, decimated. The hard part is done. Go get your own oil!”

Trump’s ire comes as several European countries, including the UK, have pushed back on US demands in the context of the war. This includes France’s refusal to allow American planes headed to Israel to flay over French territory, Italy denying US aircraft access to a base in Sicily, and of course, the UK’s hesitancy and red tape in allowing American access to British military bases.

While markets have focused on the energy crisis in the middle east, another war is fueling its own energy crisis further north. Russia’s Ust-Luga port was damaged after being struck by Ukrainian drones for the fifth time in ten days. According to Bloomberg, “Primorsk and Ust-Luga handled about 45%, or 1.72 million barrels a day, of Russia’ seaborne crude exports,” and the damage has set  Russia’s oil flows to its lowest level in more than a year