All eyes have been on Islamabad in Pakistan and talks to agree on a more permanent ceasefire between the US and Iran. But no deal appears to have been reached, which seemed fairly obvious ahead of the historic meeting. Â Any common ground on the most controversial issues appeared to be in very short supply. Iran still insists on its right to enrich uranium, which the US says they cannot accept. Another major point of disagreement is Iran’s demand to maintain control of and charge tolls on the Strait of Hormuz. Indeed, a ceasefire deal that leaves the Islamic regime in charge of the Strait is nothing but an overture to a new war in the future.
In any event, even if transit through the Strait of Hormuz resumes, the return of energy supplies is unlikely to be immediate. Output has already been reduced at oil and gas fields, while refinery operations have been curtailed or temporarily shut, suggesting that some supply disruptions may take weeks, or longer, to fully reverse. For markets, these one-off policy shocks now typically mean it takes up to a year to see the true impact in the economic data. That points to us all spending the next 6-12 months trying to figure out how much of this oil shock is inflationary, and how much it is deflationary via growth and spending channels.
We note that energy as a proportion of consumer spending has been falling for years, so it’s not 100% certain that an energy shock today is anything like an energy shock 25 or 50 years ago. In addition, people generally see that random policy shocks are fundamentally mean reverting as some or all of the actors have a finite pain threshold. That should be the case in the Middle East, but obviously uncertainty remains very high and likely continue to impact risk assets and havens. We keep in mind Trump’s usual maximalist strategy of escalate to de-escalate.
Otherwise, this week sees the start of another US quarterly earnings season, that will be a welcome change of pace from war, tariffs and what the Fed and other central bankers should do. It starts in earnest on Monday when key financial giants begin releasing like Goldman Sachs, JP Morgan, Wells Fargo and Citibank. Top of the mind may be the credit cycle and provisions in a softening economy, with risks to private market exposure also in focus.