Middle East, inflation and UK politics

Ajouté : 2026-05-12

[00:00:03]Hi, I'm Karen Ward. And I'm Hugh Gimber.

[00:00:06]Welcome to JP Morgan Asset Management's Markets Explained. Your weekly briefing, where we cut through the noise and focus on what matters most for investors, >> [music] >> setting you up for the week ahead.

[00:00:20]So Hugh, this is rather exciting, new initiative, our podcast. And the reason we're doing this is to really cut through the noise, isn't it? We found over the last months that there's just so much going on in the world. What we want to do is just provide a 15-minute snippet of what we think are the key things going on and what they mean for markets.

[00:00:43]>> Definitely, and I think it's fair to say, Karen, there is quite a lot going on. So do you want to talk us through what we're going to cover this week?

[00:00:48]>> Yeah, absolutely. So once again, we're going to be talking about the latest events in the Middle East and what that means for the global economy and for markets. Then looking ahead to the week ahead, probably the most market-moving piece of data could be the US inflation figures and then we'll cover off what's happening in UK politics and how that could be affecting at least local markets this week. So let's start off with the Middle East. We are now entering the 11th week of the crisis.

[00:01:17]And and to recap, I mean, our view here has been that it just didn't seem that there would be incentives on either side, on the US side or the Iranian side, for this to be a prolonged conflict. And that is still our base case, isn't it, Hugh? That's right. I mean, we have both countries going back and forth at the moment over some sort of plan. And I think it's fair to say that they're still some way apart. Just over the weekend, President Trump has said that Iran's response to the proposed peace plan was unworkable or unacceptable. And there are still significant differences on either sides, whether it's around sanctions relief for Iranian oil sales, whether it's really about who is controlling the Strait of Hormuz on an ongoing basis. Ultimately, I think this comes down to nuclear and Iran's ambitions to maintain some form of nuclear capability, that being a a hard red line for the US and Israel from the start of this conflict. So, we're still some way away, but importantly, I think markets are looking at these negotiations and saying, "Well, they're taking place and therefore, we are edging closer to a resolution, even if at the moment it still seems quite difficult to envisage exactly how that's going to come about." Yes, so I think it's a question, isn't it, of how much pressure gets applied on both sides in order to reach that amicable conclusion.

[00:02:43]So, on the US side, I mean, I think it's noteworthy, you often hear that US is an oil exporter these days, so it's less affected by higher oil prices. I think we have to be a little bit careful with that. We were looking last week, weren't we, at how much oil prices or or pump prices have risen around the world. And actually, one of the highest is the US gasoline prices are up 42%. It's at the end of the month when the driving season begins and therefore, the consumer in the US is going to be increasingly feeling the pinch of those higher gasoline prices and the president's going to have the November midterms increasingly in his sight and what he can do to uh carry favor with the electorate. So, it does feel like pressure's going to be building within the US.

[00:03:28]On the Iranian side, you know, it's often said that there's probably more tolerance for economic pain, but even here, I think we heard from China last week, one of the Iran's perhaps allies or or at least a a closer economic relationship, perhaps China sounding like they were getting a little bit more impatient, would like to see a resolution also. And we've got Trump off to Beijing, haven't we, this week?

[00:03:55]That's right. He'll be visiting between the 13th and the 15th, so Wednesday to Friday of this week. And I think as you say, this kind of ongoing sense that China's becoming an increasingly important player in negotiations is probably explaining some of the market's resilience and willingness to really look through the geopolitical headlines and focus more on fundamentals and earnings in particular. But do you think it's fair to say, I think there's this idea out there that because the benchmark stock indices have been so resilient that the market's looking through this crisis, ignoring it, and therefore perhaps complacent, and there could be greater risks. Is that a fair assessment? Personally, I don't think it is. I mean, as you say, if you look at markets at all-time highs and you think about what we're reading in the news every day, the two don't naturally tie together. But from a sector perspective, what's going on to me makes complete sense, which is that energy stocks are performing very well. At a global level, they're up 25% year-to-date off the back of higher energy prices. We have the tech story, which is largely independent of what's happening in the Middle East.

[00:05:05]Technology stocks up 22%.

[00:05:08]And then naturally, it's the consumer sectors that are getting hit, which again, I think makes complete sense in the context of cost-of-living pressures.

[00:05:16]So, staples up about 7%, and then discretionary stocks actually down year-to-date based on data to the end of last week. So, on a sector basis, I think those sort of rotations do make much more sense. And similarly, in the bond market as well, it's pretty clear that whether it's the shorter end of the yield curve or longer-dated bond yields, we are seeing a reaction to quite a different economic outlook to the version that we were expecting on the 1st of Jan. Okay, well, we'll come on to that, but basically therefore, the point is that the market isn't ignoring the situation in the Middle East. The longer this goes on, we know that we are working through the inventories that are out there, whether that's in refined products, in jet fuel, etc. So, the longer this goes on, the economic pain will become more difficult to tolerate.

[00:06:04]So, if we were to see a resolution, there could be I mean, that would probably be an uplift for the market even from these record highs because as you say, that consumer story that's being depressed, you'd see that catch up. You'd think so, and we've seen a pretty clear pattern of this over recent weeks that when the headlines are about de-escalation, it's those that have been hardest hit responding most positively and vice versa. So, I think you would see again further rotation, unwinding some of the sector leadership that we've seen so far this year, but overall, de-escalation from here, edging towards a deal, I do think would be a boost to risk sentiment even though we have many markets now close to all-time highs.

[00:06:45]Okay, well, let's start to talk about some of the economic data coming up this week because how the Middle East conflict is starting to affect the economy, that's going to become a feature of of the analysis as we look at the data. So, probably the most important data coming out this week is US inflation. So, headline inflation expected to pick up from 3.3 to 3.7.

[00:07:09]Obviously, that's well above the 2% target and core inflation as well also expected to rise up to 2.7. So, you know, we've seen this conversation already in Europe with the Bank of England and the ECB really grappling with whether they should be raising interest rates, whether they should say, "Look, we're so committed to our inflation target that we're going to raise rates." Or actually, whether they should say, "Look, rising inflation itself is going to damage the economy. I don't want to lean into that by raising interest rates as well, and so we should sit through it. There's that debate very much ongoing in Europe. How are these inflation numbers going to affect the conversation at the Fed, do you think, Hugh? I personally think the Fed is slightly less impacted by this idea that they need to be dashing to raise interest rates to try and control inflation expectations. Obviously that Obviously there's some political element to that, but also just the US economy being in reasonable shape today. We had the labor market data out last Friday, another pretty healthy beat on payrolls, but some ongoing moderation in the wage data. So, a point you've been making consistently this year, Karen, is about trying to take the inflation data in the context of the labor market data. And potentially some of the stabilization, I'd say, that we're seeing in the US labor market providing the Fed with that little bit more patience to wait and see, to understand how this shock is flowing through the economy before they want to make their next move. Yeah, so if we look at market pricing for the Fed at the moment, you know, 75% chance they'll still be on hold at the end of the year, but it is notable that whereas the Fed was very much expected to cut this year, now there's actually a little bit more probability that they could be hiking by the end of the year than cutting. And I guess that's it, isn't it? If inflation really starts to push up um and is prolonged and it's feeding into a broader range of goods and services, then the pressure on the Fed to demonstrate its commitment is going to build. So, that sort of takes us back to the start of our conversation, wasn't it? Where the pressure on the president to de-escalate the situation in the Middle East and bring those energy prices back down, the role of the Fed and inflation is all part of that story, isn't >> I I guess effectively what we're saying is economic escalation creates further incentives for political de-escalation.

[00:09:39]And when it comes to the inflation data this week, for me the most interesting part is not going to be what energy is doing, it's what we're seeing in food prices or what we're seeing in core goods prices and tracking some of those second round and stickier inflation impacts of what we're seeing happening in the Middle East. Okay, so we'll keep an eye on the bond market therefore this week. Turning our attention to the final item on our agenda, which is the political situation here in the UK.

[00:10:07]Obviously it was the local elections back end of last week getting all the results through over the course of the weekend. And as was expected, it wasn't a great result for Labour. They've lost a number of seats and support. And so there's a lot of pressure on Prime Minister Keir Starmer to set out a response, to set out a vision. There's a speech on Monday, there's the King's speech on Wednesday. You know, people I think the party really looking him to say, "Look, how are you going to demonstrate that we are acknowledging this response and we're going to step up and actually deliver."

[00:10:46]In terms of what actually happens and whether there is a challenge to the Prime Minister for a new leader, I mean it's it's not such an easy process as the Conservatives, is it here? It's a it's a rather more difficult process.

[00:11:01]So, to elect a new leader, a challenger needs 81 MPs to support that single leader and 5% of the constituency bodies or three affiliating bodies, which two of which must be the trade unions. So, I guess that is that's partly the question that the markets are thinking about is who would be the challenger that could provide that degree of support. And maybe that's not something that happens this week. I suspect this is a conversation we're going to come back to over the next few weeks, isn't it? But what's the gilt market telling us, Hugh, about this whole situation?

[00:11:38]>> I I think the gilt market reaction is one of the harder moves to unpack, really, because it's clear that the UK bond market has been hit harder than other regions since the start of the Iranian conflict. Um I mean, looking year-to-date, short-dated government bond yields in the UK, 2-year yields, are up nearly 70 basis points. If you look at the US, that's 40 basis points.

[00:11:59]Germany, that's 46 points. So, it's clear that the UK is being hit harder.

[00:12:04]What I'm struggling to unpack, Aaron, is how much of this truly is about UK politics or how much of this just comes back to the UK inflation picture and the stickiness that we've seen in the inflation data really for the past 3 to 4 years, added now with another shock coming through higher oil prices. What's your take on how much of that bond market move we can assign to politics versus inflation? Yeah, you're right.

[00:12:29]It's It's incredibly difficult to predict. What we have seen is short rates in the UK have been incredibly responsive to the oil price, which does show that, you know, whenever we get a cost shock, the expectation is it's going to be harder to get rid of in the UK, and that is a alone, regardless of what is happening politically, putting some upward pressure on short and long rates. And then we've got this, as I call it, the who's next premium, also. I mean, we have heard from some of the challenges um a a degree of needing to respect our fiscal position and, you know, even if there were a leftward shift um in the in the political offering, it would be um higher taxes to spend more. Um whether the bond market would still accept that, I think it is questionable that if if it was seen to be much higher taxes to spend more, but those taxes were then expected to dampen and the bond market still might not like it. So, perhaps some of the challenges should be thinking about some of those gilt market constraints, but as I say, we're probably not going to solve that one this week. This is probably something we're going to be speaking about in coming weeks. So, to wrap up then, Hugh, so we're still of course watching for the Middle East and and questioning, you know, does this need to escalate to de-escalate? Our core scenario is still that by the time we're at least pushing the autumn and inventories really are depleted, we've moved on and an agreement has been reached, but, you know, it could get increasingly nerve-racking as those inventories do get depleted.

[00:14:08]The market will be thinking about how is this going to affect the economy, how is it going to affect growth, and therefore the inflation numbers coming out of the US are going to be important for feeding that story about whether interest rates are going to have to go up in response, and then we're going to watch that UK political story. So, wishing all of you out there a really good week. We hope you found this useful. Please subscribe wherever you do receive your podcasts.

[00:14:37]Please share with anybody else if you found it useful.

[00:14:40]>> Are we too early to be asking for reviews, Karen? Is it a thumbs up or a a five-star that you hear other people begging for?

[00:14:47]>> Any of those will take it, right, Hugh?

[00:14:49]So, we'll wish you a good week, and I will speak to you next week. This communication is educational [music] in nature and not designed to be taken as advice or a recommendation to buy or sell any investment [music] or interest thereto. It is based on assumptions in current market conditions and are subject to change. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions, and investors may not get back the full amount invested. [music] Past performance, yield, or forecasts are not a reliable indicator of current and [music] future results. J.P. Morgan Asset Management is the asset management business of JP Morgan Chase & Company [music] and its affiliates worldwide.