By Bas van Geffen, Senior Market Strategist at Rabobank
A Friendly Plane Wave
Despite some perilous first hours, the armistice between Israel and Iran seems to hold so far. In the initial hours after the ceasefire came into effect, Israel accused Iran of launching several missiles. The country launched a strike at a radar station, and vowed to respond more forcefully.
Israeli military aircraft were en route to Iran when a clearly annoyed President Trump called on both sides to stop fighting. In a social media post, he warned Israel to not drop any more bombs. The planes would just do “a friendly Plane Wave” and head home. Trump managed to de-escalate the situation for the time being, but the truce remains fragile.
Complicating matters further, the US strike on Iran’s nuclear sites reportedly did not destroy any of the core facilities. A preliminary US intelligence brief concludes that the bombing only delayed the Iranian nuclear programme by a few months. Iranian officials have meanwhile stated that their work on the programme continues. If that is true, how long will Israel and/or the US let them keep going before they strike again?
For now, though, the Trump administration is denying these media reports. The president and his advisers have called the reports based on leaked documents completely ridiculous, adding that “there is no doubt that [the facilities] were OBLITERATED.”
So, markets will remain at the whims of the parties to the conflict, and to the fragile ceasefire. But any upside risk to energy prices may be capped by reports that the Trump administration has considered a range of options in case of a major disruption to oil supply. The Strategic Petroleum Reserve may not have enough capacity to offset a blockage of the Strait of Hormuz, but the reports do underscore that the US and the rest of the world will not stand for such a blockage.
And, with the ceasefire holding so far, markets have turned their focus elsewhere.
Last week’s FOMC meeting revealed that the policymakers are largely split into two camps: a group that wants zero cuts this year, and another group that believes two cuts are appropriate. Waller and Bowman are clearly in the latter group, and they feel a sense of urgency. Both indicated they are willing to cut as early as next month. But convincing the hawks will be difficult, given the recent data and lingering uncertainty.
Fed Chair Powell’s testimony before the House Financial Services Committee perhaps gave markets a shimmer of hope. Powell indicated he is open to the idea that inflationary impact of Trump’s tariffs could be smaller than expected. He added that if inflation is contained, the Fed can cut rates sooner than later.
However, as our US strategist noted, Powell’s key message really wasn’t that different from his recent remarks. The Fed Chair reiterated that he needs to see the results of the trade negotiations, and the final level of tariffs. At least some of these tariffs will be passed on to consumers, according to Powell. Until this is clear, the Fed Chair believes the economy is strong enough to allow the FOMC to wait and assess the inflation outlook. We therefore believe the Fed will wait until September for its first and only rate cut this year.
Indeed, in many cases, these trade negotiations do not seem to be going anywhere fruitful. Based on the trade deal with the UK, we already concluded that Trump will probably only accept a deal in which at least some of the US’ new tariffs remain in place. According to Bloomberg, European officials have now concluded the same. They expect that the US will leave some tariffs in place.
The European Commission has repeated they are not willing to accept such a deal, where the EU makes concessions only to face lower, or more limited, US tariffs. Stephane Sejourné stated that “we will need to retaliate and rebalance in some key sectors if the US insists on an asymmetrical deal.” And, according to the EU Commissioner for Industrial Strategy, that includes any deal in which the 10% universal tariff remains in place. The Commissioner for Trade noted that this may be the case: “I understand that the US is very much working with 10% as a baseline.”
This only underscores that the current relative calm is unlikely to persist, for the US would probably not leave such a retaliation unanswered.
