As the conflict involving Iran moves into its third week, oil markets remain tense and central banks around the world prepare for a critical round of policy meetings. Brent crude continues to trade above $100 per barrel after a weekend in which U.S. forces struck Kharg Island, Iran's main oil export hub, while the U.S. administration seeks to secure safe passage for shipping through the bottleneck at the Strait of Hormuz.
Diplomatic and naval efforts are ongoing. India secured safe passage for two of its tankers through the strait over the weekend, and the U.S. president has been lobbying NATO partners and China for naval support to protect convoys. Progress has been uneven - several countries contacted by the U.S. said, as of Monday, they had no plans to deploy vessels to the Middle East to assist, even as officials in Washington prepare to announce, possibly this week, that a group of countries have agreed to form a coalition.
Markets opened the week on a mixed footing. In Asia, Japan's Nikkei slipped 0.3% while South Korea's KOSPI rallied more than 1% following last week's declines. European equities were softer at the open with the STOXX 600 down, while U.S. futures were higher before the bell. Currency and commodity moves reflected recent risk dynamics - the dollar, which climbed over 1% against a basket of major peers during the previous week, eased a little on Monday, and gold prices were broadly steady.
The dominant macro theme this week will be central bank decisions and commentary. Major policy meetings are scheduled at the Federal Reserve, the European Central Bank, the Reserve Bank of Australia, the Bank of England and other institutions, all occurring against a backdrop of higher oil prices and questions about the economic fallout from the Iran conflict.
The Federal Reserve is not expected to change its policy rate when it meets on Wednesday, but markets will scrutinise the Fed's assessment of inflation risks stemming from a sustained oil price surge and its read on a softening labour market. On Friday, data showed core personal consumption expenditures (PCE) inflation climbed to 3.1% in February. At the same time, U.S. GDP growth for the fourth quarter of last year was revised down to 0.7%. Both the rise in core inflation and the downward revision in growth predate the Iran disruptions, yet together they highlight the policy dilemma: a supply-driven rise in energy costs can push up inflation while weighing on growth.
Market-implied paths for Fed policy have shifted. A second rate cut priced in for this year has effectively vanished from the futures curve, and the single cut still fully pencilled in by markets is not expected until December. Australia could be the only central bank to alter rates this week, with policymakers there potentially moving for a second hike this year. Most other central banks appear likely to adopt a wait-and-see stance as they assess the economic impact of higher oil prices and geopolitical developments.
Separately, China's early trade and activity data for January and February surprised to the upside on Monday, with retail and industrial figures beating forecasts and mirroring a strong trade performance over the two months. Those data points, however, were compiled before the recent spike in oil prices and should be viewed in that context. Attention will also be on face-to-face U.S.-China trade talks in Paris, where negotiators entered a second and final day on Monday. The U.S. delegation is being led by Treasury Secretary Scott Bessent. Those discussions come ahead of a planned U.S. state visit to China later this month, a trip the U.S. president said could be delayed if China does not assist with efforts to break the blockage in the Strait of Hormuz.
On the corporate front, reports emerged over the weekend that a major social media and technology company is planning substantial staff reductions. Sources familiar with the matter said the company could cut as much as 20% of its workforce. The cost and strategic implications of such a significant workforce reduction will be watched closely by technology investors and labour market analysts.
Chart of the day: Dubai authorities reported bringing a fire under control after a drone strike hit the city's international airport on Monday, forcing a suspension of flights. Global passenger movements remain heavily disrupted following the conflict in Iran, which has forced the closure of crucial Middle Eastern aviation hubs, including airports in Dubai, Doha and Abu Dhabi, and left tens of thousands of travellers stranded.
Key data and events to watch today include:
- U.S. February industrial production (9:15 AM EDT)
- Canada February consumer price index (8:30 AM EDT)
- Second day of U.S.-China trade talks in Paris
Central bankers will be listening intently to developments in energy markets and any fresh indications from incoming data about inflation or labour market slack. For markets, the interaction between an oil-driven price shock and the still-fragile growth backdrop will be the immediate concern. Investors and corporates will be assessing whether higher energy costs translate into persistent inflation that forces central banks to tighten more than currently expected, or whether the hit to demand produces a stagflationary mix of slower growth and higher prices.
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Author note: This briefing focuses on the interaction between geopolitical events, oil prices and central bank policy, and the near-term implications for markets and the global economy.