•Meanwhile in markets, with President Trump finding no off-ramp for the quagmire – his ‘special military excursion’ in Iran – oil has rallied further. But surprisingly, bond and equity markets are remarkably steady this morning;

•I do believe Trump and his henchmen when they say that they want a short war. Problem is, is that Trump can’t walk away and claim ‘victory’ if the Strait of Hormuz remains closed for basically all merchantmen traffic (every now and then a ship gets through, often owned by bold Greek shipping oligarchs). Tehran’s effective blockade of the strait means that he must either cut a deal with the regime or try to bomb it into submission. The latter has turned out to be impossible while the former has become harder still. Allegedly, with Khamenei’s son now (nominally) in charge, the regime apparently toes a harder line than it did before the Americans and Israelis decided to assassinate the top leadership. And clearly Trump is not ready to swallow his pride and cut a deal with the Iranians;

•Instead, a rather desperate Trump is trying to enlist literally any country for helping him out with patrolling the Strait. Even the Chinese. By threatening to delay his visit to General Secretary Xi Jinping, he’s exerting pressure on Beijing to help secure the Strait. Remember, China is a major buyer of Iranian oil (from the perspective of the Iranians). Fittingly, no country has come forward to help Trump out of his predicament. Because why would they, when not a single US warship is daring to cross the Strait? Furthermore, according to Axios Trump is considering occupying the strategic Kharg Island in the Persian Gulf. Not an entirely empty threat as a expeditionary Marine brigade is en route to the region;

•Turning to some market commentary, Brent crude is up four percent or so, rising to $104.50 a barrel or thereabout. Gold prices are steady, as are US Treasury yields while S&P 500 futures are up nearly a percent. The broad dollar is stable around Friday’s close. Which means that in the greater scheme of things, the broad dollar is up almost two percent on Trump’s misadventure in Iran. In the crosses, the yen has rallied following verbal intervention by Japanese officials. Japan’s Finance Minister Satsuki Katayama threatened with “bold steps”, code for outright intervention;

•In other news – it’s not only Iran – not all is well with the labor market according to a Reuters report about mass lay-offs at Facebook. To offset massive AI investment, the company is considering firing no less than twenty percent of the workforce. Remember, every way you look at it, the US economy is hardly generating any job growth – if there’s growth at all;

•Looking ahead, the calendar for today is empty, but then starts the central bank interest rate decision deluge on Tuesday, kicked off by the Reserve Bank of Australia. We have the FOMC and Bank of Canada meetings on Wednesday, then on Thursday the ECB, SNB, BOJ, BOE, Riksbank, and Czech National Bank meetings. Except for a 25bps hike by the RBA, all other central banks should keep rates on hold.

•Turning to the most important meetings, the FOMC should be a boring affair, with Chairman Powell showing little inclination to do anything in the final months of his term. Inflation and inflation risks are simply too great for the Fed to pull off another contentious rate cut to prop up the labor market. Furthermore, the Fed could be in limbo for a while longer if Chairman-designate Warsh’ nomination remains held up in the Senate;

•Regarding the ECB, expect Lagarde & Co to tilt hawkish, given the inflationary risks of the Iran war. But certainly, do not expect the ECB to tee up a rate hike for June. For starters, the new staff forecasts will only partially reflect the economic consequences of the war. Secondly, the ECB would tie itself to Trump’s whimsical decision-making on Iran. Right now, the ECB prefers the market to do its job of tightening financial conditions. Given the experiences of 2008 and 2011 (not 2022!), I believe there’s little real appetite to tighten. Concurringly, I don’t expect ECB hikes this year;

•The BOJ should be a hold, and we’ll be watching for signs of a rate hike further down the road to help the yen. I want to emphasize that Japan’s Prime Minister Takaichi is leaning on the BOJ to delay rate hikes;

•For the BOE, the war means a delay of rate cuts, not a step closer to hikes. For the BOE, this also 2008/2011, not 2022. Unlike in 2022, the labor market is soft, corporates have less pricing power, and there’s no monetary/fiscal overhang that was the pandemic stimulus. Bottom line: when it comes to negative supply shock induced central bank tightening, curb your enthusiasm.

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