Weekly focus: Middle East situation remains tense

Market sentiment has remained volatile throughout the week. Iran's strikes to Israel last weekend sparked uncertainty, which eased gradually through the week, only to be re-ignited by Israel's retaliation last night. The jury is still out on whether this leads to a wider regional escalation, but at the time of writing, Iranian sources have said there is no plan for immediate retaliation. Oil prices are still below levels seen a week ago, equity markets are down, and government bond yields are relatively little changed despite the volatility.

On Saturday, US congress will vote on new support measures for Israel, Ukraine and Taiwan. House speaker Mike Johnson has blocked the bills from a vote on the House floor for months, but the Iran's attack seemed to spark a bipartisan sense of urgency. As some of the hardline House republicans still oppose the measures, Johnson turned to democrats for support by including humanitarian aid to Gaza as part of the package. As such, the bills advanced through the House Rules Committee on Thursday with all democrat members voting in favour. The move is politically risky for Johnson himself, but good news for Ukraine. We do not yet know if Israel's latest strikes will affect the discussions in any way, but as a base case, we expect the bills to pass the final vote over the weekend.

While the past week was light in terms of macro data, the releases were generally on the strong side. US Retail Sales grew more than expected in March, as control group sales edged up by 1.1% m/m SA (Feb +0.3%). That said, more favourable seasonal adjustment factor and declines seen in sales of some of the 'big ticket' categories spark questions about the strength of the underlying trend. While US macro data shows few signs of cooling, we still remain optimistic that disinflation can continue towards the latter half of the year, with the Fed cutting rates three times this year.

Chinese Q1 GDP growth also exceeded expectations at 5.3% y/y (Q4 5.2%), although the latest March data for retail sales was disappointing. In our view, the data remains consistent with the Chinese economy 'muddling through' its latest challenges. There are some rays of light in the horizon for example on the housing sector, but growth in consumption and credit remains moderate at best despite the stimulus.

Next week, the main data focus will be on preliminary PMI data for April, as markets gauge strength of the economies at the beginning of Q2. While winter brought welcome news of recovery in the global manufacturing cycle, the latest leading signals point towards tentative signs of a peak in H2. In addition, the latest upticks in oil and industrial metal prices are set to dampen demand going forward. We discussed the outlook this week in Research Global - Manufacturing recovery to continue into the summer, 15 April.

We expect the Bank of Japan (BoJ) to stay put on the policy meeting ending early Friday after they made the decisive move to hike the policy rate out of negative territory in March. BoJ will present its new economic projections up to 2026, and focus will naturally be on the expected persistence of inflation after the recent range of solid wage growth indications. We expect BoJ to hike rates one more time this year, most likely in the July meetings. 

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