Markets were jittery on the heels of a weekend defined by terrifying headlines out of the Middle East, where Israel had to be talked out of escalating what, as of April 13, is state-on-state conflict with Iran.

That’s never really happened before. Until two days ago, Iran fought Israel (and everyone else for that matter) by proxy — through the IRGC’s surrogate in Lebanon, the Quds’ pet armies in Iraq and “a bunch of goat herders” in Yemen, as US Senator Tom Cotton indelicately referred to the Houthis a few months ago.

Now, we’re told, the region’s one IDF strike inside Iran away from a full-fledged conflagration with the potential to push a teetering world over the edge and into the fiery abyss of a Tolkien-style final battle.

Or something. I don’t know. What I do know is that US equities succumbed to their largest two-session decline since September/October (and before that SVB’s collapse) amid Monday’s war worry. the Friday-Monday down trade was a “staggering” (that’s a joke) ~2.5%.

If imaginary thresholds could talk, 5100 SPX would be telling a scary story. According to someone’s generic market wrap somewhere.

It wasn’t just the end of the world bothering equities on Monday. Part of the problem was another robust read on the US economy, where a key underlying gauge of retail sales quadrupled estimates, pointing to (more) upside for the advance read on Q1 GDP due later this month. That’s another strike against 2024 rate cuts.

Long-end yields were sharply higher, erasing Friday’s war-inspired flight-to-safety bid. Harley Bassman’s MOVE gauge is… well, it’s on the move lately.

At the front-end, the two-year’s flirting with 5% again, although the selloff there was comparatively muted to start the week: Monday was a pronounced bear steepener.

The Treasury selloff is “further escalat[ing] from yet another ‘no landing’ signal per the hot retail sales prints, risking more Fed path repricing and the removal of more cuts, indicating a shallower cycle and fattening the ‘no cuts’ tail,” Nomura’s Charlie McElligott said.

As Morgan Stanley’s Mike Wilson was keen to point out, equities are starting to notice the move in rates. “Stickier than expected CPI data last week led the bond market to price out nearly another rate cut for this year and push back on the start of the cutting cycle,” Wilson wrote Monday, reiterating that in the bank’s view, 4.40% on 10s was “a meaningful threshold for equity valuations.”

We’re now nearly 25bps beyond Wilson’s “meaningful threshold,” and if the figure below’s any indication, the rates-stock correlation could be on the verge of slipping deeper into negative territory.

Note from the blue line in the figure that large-caps’ correlation with benchmark US yields briefly turned positive earlier this year amid what BofA’s Michael Hartnett has taken to calling the “ABB” rally: Anything But Bonds.

Meanwhile, UBS had a thought. Although the bank’s base case still calls for two Fed cuts in 2024 (they lowered it from three in the wake of last week’s CPI release), resident strategists Jonathan Pingle and Bhanu Baweja said it’s possible we haven’t seen peak rates in the US.

“If the expansion remains resilient and inflation gets stuck at 2.5% or higher, there would be real risk the FOMC resumes raising rates again by early next year, reaching 6.5% Fed funds by mid-2025,” Pingle and co. said.

I’m not sure which is scarier: 6.5% Fed funds or World War III.