Take Five: War, warsh, and the deterioration of the economy?

Financial markets are showing some optimism as US President Donald Trump expresses confidence in a swift resolution to the conflict in Iran, with negotiations likely on the agenda this weekend.

This optimism could be tested by a series of data that may reveal a slowdown in economic activity and increased inflationary pressures, along with a potentially tumultuous parliamentary hearing for the future rumored president of the Federal Reserve.

Here are the key points for the week ahead in financial markets, presented by Lewis Krauskopf in New York, Gregor Stuart Hunter in Singapore, as well as Amanda Cooper, Alun John, and Marc Jones in London.

FEDERAL RESERVE LEADERSHIP: ON THE HOT SEAT?

Investors will learn more about Trump’s choice to lead the Federal Reserve when former Fed governor Kevin Warsh appears before Congress for his confirmation hearing on April 21.

Warsh faces a delicate situation in meeting Trump’s desire to see rates cut, as rising energy prices due to the conflict in Iran fuel inflation fears. Federal funds futures contracts have shifted, no longer anticipating rate cuts since the beginning of the conflict in late February.

Trump has openly expressed his frustration with current Fed chair Jerome Powell for not lowering rates more aggressively. This week, he intensified his pressure campaign, threatening to dismiss Powell if he does not step down at the end of his term on May 15.

Additionally, Tesla will feature prominently in a busy week of American corporate earnings, while March retail sales figures could reveal the impact of rising prices on consumer spending.

HALF-FULL OR HALF-EMPTY BARREL?

Iran remains a major market risk as the US and Pakistan express optimism about reaching an agreement to end the conflict and reopen the strategic Strait of Hormuz.

Stock markets, notably in the US, are betting on a positive outcome. The S&P 500 index has rebounded to historic highs and, despite concerns about Japan’s heavy reliance on energy imports, the Nikkei also reaches records.

Operators are counting on peace to return to pre-war conditions, where strong results supported prices.

The oil market is less convinced. The Brent crude benchmark hovers just below $100, still up 33% from late February levels. Immediate physical crude prices are even higher.

If negotiations fail to reopen the strait, energy prices will remain high, pressuring central banks to maintain high borrowing costs and affecting corporate profits.

A BLEAK SPRING

Next week will provide an initial look at global business resilience as the conflict in Iran enters its second month in April. March surveys revealed a sharp rise in production costs and a slowdown in overall activity, with companies dealing with volatile energy markets, disrupted supply chains, and fast-paced news flow.

Although oil prices have retreated, the threat of a global inflation shock has eased but not disappeared.

First-quarter results, especially in Europe, a region heavily reliant on energy imports, show airlines, retailers, and industrial companies are facing deep uncertainty that could squeeze margins.

The US, a net energy exporter, is relatively insulated but not immune to the effects of rising fuel prices. Investors will closely watch the “prices” and “employment” components of upcoming Purchasing Managers’ Index (PMI) surveys for signs of strain.

Inflation figures from Japan, the UK, New Zealand, and Canada are also unlikely to inspire optimism.

ASIA SUFFERS FROM HIGH OIL PRICES

Emerging Asian central banks are under pressure as well. China will set its loan prime rate on April 20, with analysts expecting the central bank to keep its benchmark rate unchanged through the year-end as the economy picks up steam. Although growth may slow due to the Middle East crisis impacting corporate profits and external demand, Asia’s largest economy fares better than many others.

The Bank of Indonesia, meeting on April 22, must defend a recently weakened rupiah. The central bank governor stated that a monetary policy recalibration is needed to support financial market stability. Meanwhile, the Central Bank of the Philippines, meeting on April 23, warned of “contagion effects” following a spike in March inflation, exceeding authorities’ targets.

THE 40% MARK

The Central Bank of Turkey holds one of its most decisive monetary policy meetings on Wednesday, a true test of its commitment to financial orthodoxy.

Given its massive dependence on energy imports, the country has been among the hardest hit by the economic repercussions of the Iran conflict. It spent nearly $50 billion from its reserves last month to stabilize the lira and was one of the few countries to have its credit rating outlook downgraded.

The prospect of a lasting ceasefire will certainly be at the center of discussions. However, with inflation still expected to reach around 30% by year-end according to economists, institutions like JPMorgan and Bank of America expect rates to be raised by 300 basis points to reach the painful level of 40%.