Middle East confrontation last ultimatum countdown inflation data this week become the "watch and wait" critical period for the Fed Global economy facing a "stress test"

Due to the ongoing escalation of the Middle East war and its impact on the global energy economy, the US stock market fell again last week, leading to a downturn in the three major US stock indices for the year. Data shows that the Dow Jones fell by about 1.0% on Friday, the S&P 500 fell by 1.5%, and both have fallen by more than 5% this year; the tech-heavy Nasdaq Composite Index fell by 2% on Friday, accumulating a 7% decline this year. The bond market also experienced selling pressure, as traders began to anticipate new inflationary shocks due to the surge in oil prices, leading to a possible Fed rate hike this year. After three consecutive weeks of decline, US Treasury yields rose to multi-month highs - the two-year Treasury yield rose by 18 basis points to 3.90% last week; the benchmark 10-year US Treasury yield soared 13 basis points to 4.38%, the highest level since late July last year. As the Middle East conflict enters its fourth week with no signs of easing, global markets continue to be under pressure. Last Saturday, US President Trump issued a 48-hour ultimatum to Iran, demanding the reopening of the Strait of Hormuz, or face attacks on its power plants. Iran responded by stating that any such attack would lead to the indefinite closure of the waterway and strikes on US and Israeli energy infrastructure in the region, indicating that both sides have the risk of escalating the conflict. Furthermore, reports indicate that the Trump administration has started planning for "talks" with Iran and is conducting preliminary discussions through a third party. US officials believe that the conflict will continue for another two to three weeks. Meanwhile, Trump's advisors are seeking to end the conflict through diplomatic means. The US demands that any agreement must include the reopening of the Strait of Hormuz and the handling of Iran's high-enriched uranium, as well as long-term agreements on Iran's nuclear program, ballistic missile projects, and support for regional "proxies". In a relatively quiet week for economic data, the market focus may be on any clues related to inflation and labor market conditions, especially after Fed Chairman Powell's hawkish comments following last Wednesday's rate decision. Key data to watch this week include the Michigan University short and long-term inflation expectations data to be released on Friday, as well as market sentiment indicators. Investors will also look at the S&P Global, Inc. data on Tuesday and the Kansas City Fed data on Friday to understand the industrial economic conditions. In terms of corporate earnings, Jefferies Financial Group Inc. (JEF.US) will release earnings on Wednesday, and Carnival Corporation (CCL.US) will release earnings on Friday, highlighting this week's relatively quiet earnings season. Oil prices remain above $100 As the Middle East war enters its fourth week, Wall Street and the general public have abandoned hopes of this conflict, and the almost complete halt of transportation through the Strait of Hormuz, being measured in days rather than weeks or months. As of the time of writing, Brent crude rose by 0.29% to $106.72 a barrel. Last Thursday, oil prices briefly fell as Israeli Prime Minister Netanyahu announced at a press conference that Israel would help the US reopen the almost stalled transportation through the Strait of Hormuz. Leaders of Israel and the US also stated that energy infrastructure would be removed from the target list for their military forces. However, oil prices quickly returned to their original levels. The CEO of Qatar Energy Corporation stated last Wednesday that it may take several years to repair the attack on its largest Ras Laffan liquefied natural gas terminal. Last Friday, Trump said: "We can talk, but I don't want a ceasefire." Due to the escalation of the US-Israel confrontation with Iran, shipping through the Strait of Hormuz has come to a virtual standstill, with over 150 oil tankers and cargo ships forced to anchor outside the strait. JPMorgan warned that the closure of the strait is not a simple inflation fluctuation but a structural shock significant enough to cause a global economic downturn. Scenario analysis by Deutsche Bank Aktiengesellschaft shows that if blockade leads to significant damage to energy infrastructure, the theoretical rise in oil prices to $200 will become a reality. The head of commodities and derivatives research at Bank of America Securities also warned that if the blockade of the Strait of Hormuz continues for several months, the global economy will inevitably slide into a deep recession, with Brent crude and WTI crude prices likely to soar above $200 per barrel. Paul Sankey, head of Sankey Research, wrote in a recent report to clients, "You break it, you fix it." He succinctly summarized the current situation, adding, "This is a frightening issue in the short term... Either Iran controls the Strait of Hormuz, or the US does." As Ray Dalio, founder of Bridgewater Associates, wrote on March 16, the conflict between the US, Israel, and Iran will revolve around a decisive confrontation in the Strait of Hormuz. The consequences will go far beyond oil prices, it will determine whether the US-led global order can survive. In a lengthy article on the X platform, Dalio wrote, "Everything depends on who controls the Strait of Hormuz." He believes that if Iran still has the ability to control the strait and even participate in negotiations on who can pass through it, regardless of how the conflict is resolved, the US will be seen as losing the war. On March 19th, France, the UK, Germany, Italy, the Netherlands, and Japan issued a joint statement announcing their readiness to take appropriate measures to ensure the safety of navigation in the Strait of Hormuz. Soon after, Canada also joined and issued the joint statement. On the evening of March 20th, the South Korean Ministry of Foreign Affairs announced that the South Korean government had decided to join the joint statement on the Strait of Hormuz issued by the seven countries including the UK, France, Germany, Italy, Japan, the Netherlands, and Canada. As the focus of the current conflict, both the US and Iran are showing great interest in the Strait of Hormuz. It is reported that the US military is currently deploying additional troops to the Middle East, with the objective of securing control of the Strait of Hormuz. Three US warships, including the "Boxer" amphibious assault ship, and around 2,500 Marines have set sail from San Diego, California, to the Middle East. Earlier, the US Department of Defense had deployed the USS Tripoli amphibious assault ship carrying the 31st Marine Expeditionary Unit to the Middle East from Japan. It is revealed that this troop deployment will provide Trump with more military options, including the possibility of launching an operation to reopen the Strait of Hormuz, which would require deploying air and naval forces to the Iranian coast. Additionally, the Trump administration is also considering deploying ground troops to the Iranian oil export lifeline of Khark Island, which aims to seize the island as leverage to force Iran to restore passage through the Strait of Hormuz. In response to the US military's plan to seize Khark Island, sources in the Iranian military have stated that if the US launches a "military aggression" against the island, it will face "unprecedented retaliation" since the US-Israeli attacks on Iran. Fed stays put, but rate cut expectations shift The Federal Reserve decided last week to keep interest rates unchanged, a result that was largely in line with market expectations. However, the cautious tone of the Fed's policy is prompting Wall Street to reassess the timeline for rate cuts. In a speech to reporters last Wednesday, Fed Chairman Powell acknowledged that the oil crisis triggered by the Middle East war could raise inflation. The rise in energy prices not only affects overall inflation but could also further push up so-called "core inflation" through increases in prices of goods and services if it lasts long enough. This has forced the Fed to reassess the path towards gradual rate cuts that were previously expected, with the current outlook being redefined as a longer pause and even a possible return to rate hikes if price pressures accelerate. Regarding the next policy meeting, Powell stated that the data to be released in the next six weeks will be "very important for assessing economic performance and changes in prospects," but for now, "all we can really do is watch and wait." Bond traders currently anticipate a 50% probability of a rate hike by the Fed by October. This judgment represents a startling reversal from market expectations before the outbreak of war, and also contrasts sharply with the latest "dot plot" released by the Fed - which forecasts one rate cut this year and another in 2027. AI enters the "let performance speak" stage At the same time, do not overlook the theme of AI trading. Last Tuesday, NVIDIA Corporation's CEO Jensen Huang announced at the annual GTC conference that the company would achieve $1 trillion in revenue solely through the Grace Blackwell and Vera Rubin chips. But this news was not enough to stop the sell-off in the tech industry. NVIDIA Corporation fell by about 4.1% over the week, while the broader tech sector (IGV) fell by 1.4% over the five trading days, with a decline of over 20% this year. Micron Technology, Inc. announced last week its plans to expand capital expenditure by $5 billion for the fiscal year 2026, but this also failed to impress investors. Tech analyst Jeffrey Favuzza of Jefferies Financial Group Inc. wrote in a client report last Thursday, "This is the second time (the other being NVIDIA Corporation) that amazing performance data has been treated by the market as a 'good news to cash out and sell off event.'" In other words, even impressive data is increasingly struggling to support the high valuations of tech giants that are already at high levels. According to Neha Khoda, a credit analyst at Bank of America Corp, AI has officially entered the "let performance speak" stage, where "AI's positive impact is increasingly being offset by its negative effects." She stated, "From the perspective of company fundamentals, we may be at a turning point driven by AI."