May 22 - Diplomacy continues to dominate market sentiment as the Iran war approaches the end of its third month with no clear resolution. That geopolitical strain is layering onto an already complex policy backdrop: central banks are bracing for their next steps while fresh inflation data adds pressure on both U.S. and Japanese decision-makers.
Where the stress is showing
Beyond the strength in high-profile technology stocks, widening vulnerabilities are becoming apparent across several markets. Asian currencies have been sliding, parts of Europe are showing signs of weakening activity, and the world’s largest government bond market has come under renewed selling pressure. In the U.S., 30-year Treasury borrowing costs reached their highest level since 2007 this week - a notable move for a market regarded as systemically important.
Bond market participants appear to be pricing in the view that central banks will find it difficult to ignore the inflationary impulses stemming from a conflict that has disrupted traffic through the Strait of Hormuz. If governments respond with additional fiscal support to shield consumers - a course Japan has signalled as a risk - that could further heighten sovereign debt burdens.
Europe absorbed most of the stress during the March bond selloff. The spotlight has shifted to U.S. Treasuries more recently, an unwelcome development for those now charged with steering U.S. monetary policy.
Political shocks and local market spillovers
Political developments are contributing to market unease in other regions. A Turkish court's decision that effectively ousted the main opposition leader Ozgur Ozel has pushed Turkey back onto investors' worry list. Markets reacted sharply: stock prices plunged and the lira fell to a fresh record low. Turkey’s central bank, which had paused an easing cycle as the Iran war affected the country’s energy import-sensitive economy, has already intervened by selling billions of dollars of foreign exchange reserves to mitigate the fallout.
A packed central bank calendar
A range of central bank meetings is scheduled in the coming days, with widely divergent starting positions. Israel is likely to begin the sequence with a quarter-point cut to 3.75%, a move that markets see as supported by the shekel’s roughly 20% appreciation over the past year, which has helped to restrain the war-fuelled inflation pressures seen in other economies.
Elsewhere, Hungary looks set to hold rates at 6.25% on Tuesday as its new post-Viktor Orban government settles in. Sri Lanka’s central bank is expected to remain on hold on the same day, and New Zealand is forecast to keep its policy rate at 2.25% on Wednesday. Thursday brings South Korea’s meeting, where the central bank is anticipated to maintain rates at 2.5% despite increasing market talk of further tightening. South Africa is the exception in that group: officials are widely tipped to raise their policy rate by 25 basis points in response to sharply rising inflation.
Inflation data and the U.S. outlook
Thursday will also deliver the latest U.S. inflation snapshot in the form of the April personal consumption expenditures price index, the Federal Reserve's preferred gauge. Recent readings have shown elevated levels for both consumer and producer prices as higher energy costs exert upward pressure.
Investors will be watching that inflation print alongside a fresh estimate of first-quarter GDP and the most recent consumer confidence figures. Corporate earnings from large retailers and technology-related companies - including Salesforce, Best Buy and Costco - may provide further insight into the durability of consumer spending and the performance of the AI trade as a robust Q1 reporting season winds down.
Bank of Japan and the question of normalisation
The Bank of Japan has been searching for evidence to justify a return to more conventional policy settings, and this week’s inflation release could bolster that case. Market participants have moved toward greater certainty that the BOJ will implement a rate increase next month - the first since December - after a hawkish hold at its last meeting.
Economists forecast that Tokyo’s core consumer price index rose 1.5%, matching the April reading. While that pace was the slowest in four years, the underlying picture is complicated by government subsidies provided to households to blunt the impact of the Middle East crisis. Analysts nonetheless expect inflationary pressure to build as oil prices stay elevated and the weak yen pushes up import costs.
AI and the reshaping of financial-sector labour
The potential for artificial intelligence to alter job structures in finance has moved from hypothetical to observable. Standard Chartered said it will cut almost 8,000 roles, with CEO Bill Winters describing the decision as a replacement of "lower-value human capital" with technology. Winters later indicated that the changes would be managed thoughtfully, but his language underscored the disruption that advanced data-processing tools can inflict on traditional tasks.
Senior figures at other global banks have offered similar warnings: JPMorgan’s chief executive and HSBC’s leadership have both highlighted forthcoming job changes linked to AI adoption. A recent survey conducted by Morgan Stanley found that 11% of positions at banks had been eliminated because of AI, with an additional 14% of roles not backfilled; new hiring partially offset the net workforce decline.
The trajectory suggests more operational planning and public communications in the weeks ahead as firms decide how to deploy technology and manage its workforce impact.
Graphic and production credits
Graphics by Vineet Sachdev, compiled by Yoruk Bahceli, editing by Gus Trompiz.