Dear all,

Market performance over the past month reveals many perplexing yet interesting developments. As seen in the chart below, the dollar surged ahead (1.2%), but gold, which typically moves inversely to the dollar, also surged (4.0%). The simultaneous rally seems to reflect risk-aversion sentiment driven by the Israel-Iran conflict.

Yet at the same time, bonds did not perform their usual role as safe-haven assets, with bond prices retreating after the release of strong US retail sales data for March, which reflects another facet, the expectation that the timing of rate cuts would be delayed given how resilient the economy has been.

In the meantime, most stock markets saw pullbacks, and various factors have been cited: geopolitical tensions in the Middle East, valuation adjustments, concerns of the possibility of rate hikes, etc.

With all the mixed signals, what are the underlying trends?


Israel-Iran Conflicts Not Cause for Concerns for Fed Policy Shift

From last year’s Red Sea crisis to the Israel-Iran conflicts in April, we’ve closely monitored the potential implications on inflation, presenting key findings grounded by data. In this context, we believe the Israel-Iran tensions can be seen as noise, at least for now. The key lies in the Strait of Hormuz, the vital waterway where 20% of global oil supply passes through, which, as we’ve noted on various occasions, has remained largely unaffected, keeping oil prices in check between $80-85 per barrel in April.

In this context, even though US CPI saw a brief rebound, the impact on the broader trend is minimal. UMich Inflation expectations remaining at low levels, CPI less shelter sliding to 2.3%, and the continued downward trend in year-on-year rent inflation all point to further easing of inflation, though the trend has shifted from a rapid decline (from the mid-2022 peak of 9% to 3.5%) to a slower pace.

Moreover, the primary driver of that slowdown is not war risks, but rather strong US demand (inflationary pressures from service demand). This is also why the Fed doesn’t need to directly pivot back to rate hikes, but instead focuses on awaiting the right timing for rate cuts.

Additionally, the upcoming FOMC meeting will be crucial...

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