A potential 60-day ceasefire between the US and Iran has sent oil sharply lower, providing some short-term relief to energy markets. However, the broader macro picture deteriorated further last week, with US consumer confidence collapsing and inflation expectations surging. Stagflation risks have rarely been more visible, and the incoming Fed chair Warsh faces an almost impossible policy situation. Bitcoin has drifted lower in an orderly fashion, volatility has collapsed, and USDe yield sits around 3.75 percent.
Geopolitics: Iran Ceasefire in Focus
The dominant global story of the week is a potential 60-day peace deal between the US and Iran. Both sides have floated different proposals, and the precise terms remain unclear, but markets are pricing in a meaningful de-escalation. The expectation is that the Strait of Hormuz would reopen under any deal, with formal nuclear negotiations to follow over the coming two months.
Oil markets reacted sharply to the news. WTI fell 13 dollars per barrel on the week to 94.4 dollars, while Brent dropped even further, by 17 dollars, to 95.4 dollars. This pattern mirrors earlier episodes in which geopolitical tension is rapidly de-escalated, a dynamic Hilbert has previously referred to as the Trump taco trade: maximum pressure followed by a rapid partial reversal that leaves markets where they started or slightly higher.
Macro: Stagflation Signals Intensify
Last week's US economic data was broadly poor. Services PMI missed at 50.9 against 51 expected, though manufacturing PMI beat. The bigger concern was the University of Michigan consumer data: expectations collapsed to 44.1 against 48.5, and sentiment missed badly at 44.8 against 48.2. These readings suggest that US households are pulling back sharply on their outlook for the economy.
More concerning still were the inflation expectations. The University of Michigan one-year measure surged to 4.8 percent against 4.5 expected, and the five-year measure hit 3.9 percent against 3.4 expected. The combination of collapsing consumer confidence and rising inflation expectations is a textbook stagflation signal, and it puts the Federal Reserve in a particularly difficult position heading into the Warsh era.
FOMC Minutes: A Divided Committee
The FOMC minutes published last week confirmed that the Fed is willing to hold for longer and would consider hikes as the next move. Three governors pushed to make that language explicit in the public statement, but the language was watered down before publication. The result is a committee that looks more hawkish than the market had been pricing, even if the signal was softened at the margin.
Despite the hawkish tilt in the minutes, Hilbert's view remains that rate hikes will not happen. The demand destruction now visible in consumer data is likely to intensify as the effects of higher oil work through the real economy, and the Fed is expected to look through near-term inflation when growth deteriorates sufficiently. Market pricing disagrees, with Fed fund futures assigning a 55 percent probability to at least one hike by December, alongside zero probability of any ease.
| Indicator | Actual | Expected | Signal |
|---|---|---|---|
| Services PMI | 50.9 | 51.0 | Miss |
| Michigan expectations | 44.1 | 48.5 | Large miss |
| Michigan sentiment | 44.8 | 48.2 | Miss |
| UMich 1y inflation exp. | 4.8% | 4.5% | Hot |
| UMich 5y inflation exp. | 3.9% | 3.44% | Hot |
This Week's Calendar
The data calendar is relatively light this week. ADP employment on Wednesday, PCE on Thursday and Chicago PMI on Friday are the key releases. In practice, geopolitical news flow around the Iran deal is likely to dominate price action for most of the week. With month-end on Friday, positioning adjustments could amplify moves in either direction.
Rates and Markets: Curve Starts to Flatten
US Treasury yields moved in opposite directions last week, producing the bull flattening that Hilbert has been anticipating. The 10-year yield fell 5 basis points to 4.56 percent, while the 2-year rose 3 basis points to 4.12 percent. That 8 basis point flattening on the week is a meaningful shift in the curve's structure and supports the view that the long end will stabilise as growth fears displace inflation fears over time.
US equity markets continued their sharp recovery. Nasdaq closed just under 30,000, up roughly 1,000 on the week, while the S&P 500 reached 7,542, up around 200 points. Gold held steady at 4,550, and the dollar index remained flat at 99. The equity rally stands out as somewhat detached from the deteriorating macro signals, sustained in part by the prospect of a geopolitical ceasefire and continued liquidity.
| Asset | Level | Weekly change |
|---|---|---|
| US 10y yield | 4.56% | -5bp |
| US 2y yield | 4.12% | +3bp |
| 2s10s curve | 44bp | -8bp (flattening) |
| Nasdaq | ~30,000 | +1,000 |
| S&P 500 | 7,542 | +~200 |
| Gold | 4,550 | Flat |
| DXY | 99.0 | Flat |
| WTI | 94.4 | -$13 |
| Brent | 95.4 | -$17 |
| Natural gas | 3.00 | -$0.18 |
Fed Funds Pricing
With a Fed meeting in 23 days, futures markets are pricing a 98.1 percent probability of no change and just 1.9 percent for a hike at that meeting. Warsh's first committee will almost certainly produce no action. By December however, futures are pricing a 55 percent probability of at least one hike, with zero probability of any ease. Hilbert's view is that the demand destruction currently building in the US economy will ultimately force the Fed's hand toward cuts, not hikes, but the market remains firmly unconvinced.
Bitcoin: Orderly Decline, Volatility Collapses
Bitcoin moved lower in an orderly fashion over the past week, testing the lower end of a well-defined range before finding some support on the Iran ceasefire news over the weekend. Volatility collapsed notably: realised vol fell to around 32 percent and implied vol dropped to 31 percent, meaning realised is now slightly above implied, a reversal of the premium seen in recent weeks. Both numbers are significantly lower than a week ago.
The short-term technical picture turned bearish on 17 May. Support comes in at around 73,000 on the 100-day simple moving average and at 77,000 on the exponential moving average, which is approximately where Bitcoin is trading now. Resistance on the upside sits at 80,400 initially and then 81,400. A sustained break and hold above 81,000 to 82,000 on a daily basis remains the condition needed before the broader picture shifts back toward bullish.
We need to clear the 81,000 to 82,000 area and hold it on the dailies. We have not been anywhere near doing that in the last few months.
| Level | Price | Notes |
|---|---|---|
| 100 day SMA | ~73,000 | Key support |
| 100 day EMA | ~77,000 | Current trading area |
| First resistance | 80,400 | Needs to clear and hold |
| Second resistance | 81,400 | Bull regime trigger |
| Downside gamma | 75,000 / 70,000 | Acceleration zones on break |
| Upside gamma | 80,000 / 85,000 | Market maker delta buying |
Volatility and Flows
ETF outflows totalled 1.3 billion dollars for the week, with around half of that, 650 million dollars, coming on Monday 18 May alone. Open interest fell by 5,000 contracts to 253 billion, suggesting that positioning is being reduced rather than rebuilt. The vol skew has softened materially: five-delta puts are at 45 percent implied vol, down from 54 percent a week ago, while five-delta calls are at 34 percent. The put-to-call premium stands at 11 percentage points, down from around 21 points a week ago.
The most notable feature of the vol market is the concentration of gamma at 80,000 dollars. If Bitcoin can move into that zone, a gamma-driven squeeze higher looks possible, with 85,000 the next key level above. On the downside, gamma support kicks in at 75,000 and then 70,000. Given the current positioning and macro backdrop, a test of the downside levels looks more probable in the near term than an upside gamma squeeze.
| Vol metric | Level | vs. prior week |
|---|---|---|
| Realised vol | 32% | Down significantly |
| Implied vol | 31% | Down significantly |
| 5-delta puts | 45% | Down from 54% |
| 5-delta calls | 34% | Down from 35% |
| DVOL | 34.7 | Lower |
| ETF flows | -$1.3bn | Outflows |
| Open interest | 253 | Down 5,000 |
USDe and Ethena: Yield Drifts to 3.75%
USDe yield has drifted down slightly to approximately 3.75 percent this week, from around 4 percent the previous week. No significant changes to TVL or the stablecoin structure were reported. The system continues to operate normally, and the acute stress from earlier in the month has not returned. Hilbert's monitoring stance is unchanged. With a relatively quiet week ahead on the crypto data front, attention will remain on geopolitics and month-end flows as the primary drivers.
