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Trump - Xi summit in Beijing

President Trump will travel to Beijing to meet President Xi on May 14-15, for a summit that was originally scheduled in March but was postponed due to the war with Iran. There are, of course, a vast number of issues that could be — should be — discussed during this summit. This is the most consequential relationship in the world. But the focus of attention will likely be on the trade relationship, the war in Iran and the US policy towards Taiwan.

On trade, we are half way through the one year truce, if we can call it that, on the US - China trade war. The deal reached between the US and China in Busan last November 1, provided for a one-year pause on some tariffs and export controls. According to the White House, the Chinese side agreed to, among others:

1. Suspend all retaliatory tariffs and non-tariff measures (including expansion of the unreliable entities list) announced since March 2025;

2. End the flow of fentanyl to the US and of its precursor chemicals and certain other chemicals to North America;

3. Suspend the global implementation of export controls on rare earths and related measures that had been announced in October 2025 and issue general licenses for the export of rare earths, gallium, germanium, antimony, and graphite for the benefit of U.S. end users worldwide;

4. Extend the expiration of its market-based tariff exclusion process for imports from the United States and exclusions until December 2026;

5. Terminate anti-trust and other regulatory investigations on US companies involved in the semiconductor supply chain;

6. Suspend the actions taken in retaliation for the US Section 301 investigation on China’s Targeting the Maritime, Logistics, and Shipbuilding Sectors for Dominance.

7. Purchase 11mmT of US soybeans by end-2025 and 25mmT of soybeans in each of 2026, 2027 and 2028.

The US, in turn, agreed to:

1. Lower the ‘fentanyl’ tariff on China to 10% and maintain the 10% ‘reciprocal’ tariff rate until November 10, 2026;

2. Extend the expiration of certain Section 301 tariff exclusions until November 10, 2026;

3. Suspend until November November 10, 2026 the application of the “Expansion of End-User Controls to Cover Affiliates of Certain Listed Entities” that had been announce in September 2025;

4. Suspend until November 10, 2026, implementation of the actions taken in following the Section 301 investigation on China’s Targeting the Maritime, Logistics, and Shipbuilding Sectors for Dominance.

The tariff and other administrative measures are easily verifiable. As for purchases of agricultural goods, after having fallen to essentially zero by May of last year, US exports of soybeans, sorghum and lumber — the three products explicitly mentioned in the deal, started rising in November. Soybean exports are running at an average monthly pace of 2.1mmT since November, consistent with the commitment made.

So, unlike the Phase One deal in January 2020 that was scuppered by Covid, China appears to be living up to its commitments made last November. However, imports of agricultural commodities other than soybeans, sorghum and timber were at at least a 15-year low last year. So perhaps this week we’ll see Trump demand that China increase imports of corn, rice, wheat, beef etc. Meanwhile there’s lots of speculation that Xi will commit China to buying 500-600 Boeing aircraft valued at about USD100bn based on list prices.

If Xi Jinping can get Trump to focus on ‘wins’ like commitments to buy more American goods, he might thereby be able to divert attention from more fundamental and structural problems such as the undervalued CNY, intellectual property rights theft, subsidies and other aspects of industrial policy, etc. That would be a win for Xi.

Both sides might want to get the other to further ease up restrictions on trade in sensitive products. The US would want China to commit to further relaxing — and for longer — export controls on rare earths, while China would want the same for US controls on sales of semiconductors and semiconductor manufacturing and designing technology. Any progress on this front would be an important and positive outcome from these talks and would send a more positive signal about the relationship between the two countries than an agreement on a shopping list.

But overall, trade may be becoming less of an irritant — at least, from the Chinese side. After the Supreme Court struck down the IEEPA tariffs (the Court of International Trade struck down the Sec 122 tariffs last week but they remain in effect pending an appeal of that decision), and after Trump backed off his threats of very high tariffs on imports from China, the effective tariff on imports from China is now about 22% versus 9% for the rest of the world. That’s still a wide gap, but last summer the gap was 42% vs 9%. As long as this truce in the trade war continues — and maybe Trump and Xi agree already this week to extend it beyond November — tariffs are perhaps an acceptable cost of doing business with the US.

Which leaves strategic issues as perhaps the area where the leaders will spend more time talking. With Trump’s ceasefire in Iran faltering — the two sides continue to take pot-shots (“love taps”) at each other — and Iran not showing any sign of giving in to US demands, Trump may ask Xi to stop supporting Iran. I doubt he’ll get very far. The war in Ukraine will likely get lip service — both sides support an end to the war, but neither is willing to do anything to promote it. China supports Russia and the US has lost interest in supporting Ukraine.

Taiwan will, as usual, likely get the lion’s share of attention. Xi will ask, again, that the US make clear that it is opposed to Taiwan independence. The current US policy is that they do not support it, which is not as forceful as the Chinese side would like. The US will likely say that China’s shows of force around Taiwan — and its claims to large parts of the South China Sea and the East China Sea are a source of regional tension. Xi will counter that the US’ web of alliances and its ‘freedom of navigation’ transits are a bigger threat to regional stability. But Trump wants Xi’s help to arrange a summit with North Korea’s Kim Jong Un, so he will likely avoid pushing to hard against China on these issues.

The relationship is too important for this summit to fail to produce any progress. Both leaders want to be able to demonstrate that they can work with the other, that the relationship is improving and that they are making progress on the issues that divide them. In addition to Xi’s shopping list, we’re likely to see at least more clarity on Trump’s Board of Trade idea, a technical working group that would continue discussions on trade issues, and perhaps also a Board of Investment to do the same for cross-border investments. The latter is something the Chinese side has reportedly asked for.

Asia Pacific’s export recovery is broadening

Now that we have the Q1 trade data for all Asia Pacific economies, we can highlight the most interesting recent development.

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With the US-Iran war now in its third month, the two sides remain deadlocked in an unproductive ceasefire. The US-Israeli bombardment inflicted enormous damage but no…

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With the US-Iran war now in its third month, the two sides remain deadlocked in an unproductive ceasefire. The US-Israeli bombardment inflicted enormous damage but not only did it not create conditions for the Iranian people to topple their government it led to more hardline leadership taking over. Iran quickly exploited its ability to effectively halt the flow of oil through the Strait of Hormuz — something the US by all accounts didn’t anticipate — and bring the cost of war home to all Americans. They also attacked states in the region who have supported the US, turning this into a regional conflict. Something that, again, the US seems not to have anticipated.

Even further abroad, after German Chancellor Merz said that Iran had “humiliated” President Trump by closing the Strait of Hormuz and fighting the US to a draw, Trump announced the US will withdraw 5,000 of the 35,000 US troops based in Germany. And likewise for Italy and Spain, who have also openly opposed the Iran war.

And on Friday Trump announced that he will raise the tariff on European automobiles to 25% (from 10%) because the EU hasn’t ratified last July’s “deal” with the US; a deal that the EU says the US broke by raising tariffs on steel and aluminium last August. But neither has the US side enshrined the “deal” in law. So Trump will probably use the same IEEPA authority to raise this tariff — because there has been no Sec 232 or Sec 301 finding — that was ruled unconstitutional by the US Supreme Court in February.

Deadlock means the Strait is closed, oil prices rise

So stalemate. Trump called a ceasefire to try to negotiate a way out of his war, but Iran is holding a firm line. The US blockade of their shipping must first end and they would accept JCPOA-like conditions on uranium refinement but would not dismantle any facilities. Neither condition is acceptable to Trump, so the war is on hold but negotiations, if they happen at all, are not making progress towards an end to the war.

So the US blockade of Iran and the Iranian threats that have halted almost all traffic through the Strait remain. And so oil prices grind higher with spot prices approaching their pre-ceasefire levels and futures exceeding them.

This has played out for nearly a month and it’s hard to see how this stalemate ends. President Trump seems averse to re-starting the aerial bombardment because it alone is unlikely to dislodge the IRGC and will provoke a broader regional conflict as before. And of course it doesn’t re-open the Strait. Repeated deadlines to Iran to give up their nuclear weapons programs and re-open the Strait or else face a resumption of bombardment have passed without effect. Trump wants to be done with this war, but Iran seemingly isn’t willing to negotiate an end just yet and each time they call his bluff and he backs down only emboldens them.

The US could use the blockade to starve the Iranian economy. Already, the IMF reports Iranian inflation reached 72% in March, twice the rate at the beginning of the year. But even hyperinflation isn’t sufficient to topple governments. Starving them out would be time-consuming, and would require pressuring Russia and China to stop them helping Iran get around the blockade. It would be painful for the Iranian people, but the US routinely under-estimates the willingness of other societies to withstand pain.

So we could be facing many more months of this. And while plans are being made for new pipeliness to circumvent the Strait, this will take years. Spot Brent is back up to USD124/bbl — Trump announced his ceasefire when it was USD138/bbl — and September futures are 40% higher than they were on February 27. Spot Brent rose 11% last week but I wouldn’t expect another week of similar price increases will convince Trump to back away from the Gulf. He’s committed three aircraft carrier battle groups and more than 10,000 troops to this war. He wants to win, but even changing the meaning of “win” won’t convince Americans if Iran says the war isn’t over.

A brief interlude of lower pump prices

Meanwhile, Trump’s Iran war is deeply unpopular at home. While Trump claimed the US would not be affected by the closure of the Strait because it is an oil exporting country, Americans pay the world price for oil. The price for a barrel of West Texas Intermediate oil has risen more than 60% since the war began, similar to the rise in Brent spot prices. Americans are paying more than 30% more for a gallon of gas, a much higher price increase than consumers in Europe have been dealt.

Since retail prices for automotive fuels in Asia Pacific generally lag crude oil by a week or two — where they’re allowed to adjust, that is — consumers got a bit of a reprieve last week with a pullback in prices at the pump.

In the Philippines, where gasoline prices were at one point nearly 80% higher than they were before the war, prices have pulled back nearly 10%. In Australia, where the peak price increase was about 60%, prices have since fallen about 27%. In Vietnam, prices have fallen about 20% from their wartime peak.

But this may only be a brief interlude. Last week’s rise in crude oil prices will likely feed through to prices in these — and most other Asia Pacific — economies over the next week or two. And while India, Indonesia and Malaysia have essentially protected almost all consumers from facing any increase in fuel prices, most other governments have also absorbed at least some of the higher cost of oil through tax cuts or partial subsidies. So we will see higher fuel prices in these other economies even with partial subsidies.

Economic impact is more clearly recognized

As is easily understood, the longer this conflict goes on — and in particular, the longer oil prices stay elevated (and the higher they go) — the higher the economic cost. The Asian Development Bank last week published a revised assessment of the impact on Asia Pacific economies from this war, updating their Outlook published only a few weeks ago. Their initial assessment, formed in March, assumed a conflict lasting a month with only temporary disruption to crude oil markets. That assumption is no longer valid. Their new base case assumes a USD96/bbl oil price for 2026 and USD80/bbl in 2027 versus about USD80/bbl in their previous baseline.

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Like teenagers at a high school dance, both sides are trying strenuously to avoid appearing to be too eager to meet. Witkoff and Kushner must have whiplash from the number of times they’ve been sent off to Pakistan only to turn back. The Iranian side says they won’t talk to the Americans until the latter’s blockade is over; but they’ll talk to them through the Pakistan government. Passing notes in class.

And both are trying to use the same thing as leverage: freedom of navigation through the Strait. So we have a blockade of a blockade, neither succeeding in getting the other side to make concessions. “I’ll show you mine if you show me yours.”

But the assymetry of this stand-off is glaring. Trump is merely bored; for Iran this is existential. Trump faces a potential political cost if oil prices remain high for too long. Iran’s government will likely have to print money to replace the oil revenues it cannot earn. Add escalating inflation to the shrinking economy. If Trump doesn’t want to send ground troops in and doesn’t want to risk re-igniting a drone war with collateral damage to other countries in the region, he may have to keep his forces in place long enough for the Iranian economy to collapse and hope that convinces the regime to accept his terms. Low-risk, but expensive and resembling the ‘forever wars’ against which he framed his entire foreign policy.

In markets, though, the war has seen a return to familiar dynamics. Rising/falling US yields — reflecting both inflation expectations and a risk premium — have been associated with a stronger/weaker dollar. And equities and bonds are once again positively correlated.

My sense is that with the conflict on hold and some chance, however slim, of a negotiated end, markets are responding to the slight pullback in front-end oil prices — even though they were up last week — and data suggesting economies are handling the rise in energy costs perhaps surprisingly well so far. US employment and retail sales data have strengthened, and exports in March from South Korea, Taiwan, Singapore and Vietnam grew faster than they did in Jan/Feb. Malaysian exports also continue to grow strongly.

The lowering of US tariffs in February, albeit perhaps only for a few months, has also created perhaps a bit of an offset to the oil shock in the form of another brief surge of US imports.

So there are good reasons to be more optimistic than during the weeks of bombings and missiles and an escalating regional conflict. But this may just be an interlude before the resumption of hostilities, in which event I would expect oil prices to spike again, equities and bonds to sell off and the dollar to rally in APAC. I don’t think investors aren’t aware of this risk.

Moreover, consumers in most economies, are struggling with much higher energy costs. US real retail sales grew at an impressive 0.8%mom(sa) in March despite a 20%+ rise in gasoline prices, but one can imagine this may not last. As I pointed out two weeks ago, the fact that core CPI in March only rose by 0.2%mom(sa) doesn’t mean much — it takes more than one month for ‘second-round’ effects of higher oil prices to show up in core inflation. And as it does, real consumption growth is likely to slow.

Some APAC consumers have faced even higher fuel price increases. As I’ve pointed out from the beginning, the Philippines has historically had the highest sensitivity of fuel prices to crude oil prices, and indeed as I show below, gasoline prices there have risen much more than in other economies. This prompted the central bank to hike rates last week, the first APAC central bank to raise rates in response to higher oil prices.

The Reserve Bank of Australia had hiked in March and cited higher oil prices as a new upside risk to the inflation outlook. But this was the second rate hike this year and had been telegraphed before the outbreak of the war. But since the war’s start, another two rate hikes have been added to the forecast, in part because of higher oil prices but in part because of stronger employment and credit data.

Asian consumers feeling the pinch

Gasoline prices in Asia Pacific are generally lower than they are in the US, Canada or Europe and thanks to subsidies and some tax cuts, they’ve mostly risen less than in those more advanced economies. But that doesn’t mean consumers aren’t feeling the pain.

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President Trump’s agreement to a two-week ceasefire with Iran provided the rarest of market reactions: every APAC equity market joined the US and Europe in rallying last week. That …

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President Trump’s agreement to a two-week ceasefire with Iran provided the rarest of market reactions: every APAC equity market joined the US and Europe in rallying last week. That had only happened four times in the past six years. Global equities rose 4.1% last week, their best performance since November 2023 as spot Brent crude fell 10% on the announcement and 14% for the week.

Unfortunately, these gains were built on such a flimsy foundation that the ceasefire is probably best described as a pause. After twenty-one hours of talks, the US delegation led by Vice President Vance has returned to Washington. President Trump has announced a blockade of Iranian ports will begin on Monday and any ship passing through the Strait of Hormuz that has paid a toll to Iran (how will they know? have they hacked the Iranian government email?) will also be blocked. This effectively ends the ceasefire as a blockade is a hostile act.

It would be wildly optimistic to assume that all of the issues at stake could be resolved in only 21 hours of talks, given how far apart the two delegations’ demands were and how complex the issues are, so will Vance return to Islamabad — the Iranian’s seem open to resuming talks — or were the Americans never really serious about negotiations? Trump is not one for compromise, so my guess is that the talks were an opportunity to present their demands to the Iranians and receive their reply but that there was no intention to give any ground on any of the items.

The current position is a strategic failure for the US that the administration will be loathe to let stand nothwithstanding Trump’s evident desire for this war to be over ASAP. A view that is clearly not shared by Israel.

The US has not achieved its goal of ensuring Iran will “never” build or acquire nuclear weapons; they may have destroyed its navy, but that has not stopped Iran effectively closing — and now claiming control of and demanding tolls to transit — the Strait of Hormuz; and Iran still has enough drones and ballistic missiles to cause havoc in the region. The threat to Israel has not been removed and Iran’s attacks have undermined Gulf states’ efforts to diversify their economies away from oil and gas while damaging those industries significantly.

So I expect that soon the two sides will be back at it.

The key issue for investors, still, is what this means for oil prices. An effective ban on Iranian oil exports will mean higher oil prices. Transits through the Strait had picked up slightly in the week prior to the ceasefire as some APAC governments had negotiated agreements with Iran to allow passage for some cargos heading to this region. But flows were barely a tenth of what’s needed to ease energy supply anxiety in the region. Will a blockade make shipowners more likely or less likely to want to make the passage? Less, I would think.

While spot oil prices fell last week, longer-term oil futures — beyond September 2026 — ended the week higher than they were before the ceasefire was announced. Perhaps they were pricing in a dollar-per-barrel transit fee. Or perhaps traders just didn’t see the ceasefire holding. I expect spot and futures prices to rise this week.

Investors celebrated a subdued core CPI report in the US on Friday. Just as China’s positive PPI inflation rate — a consequence of higher commodity prices — doesn’t mean deflation in the corporate sector has ended, so too the US CPI data don’t mean fuel price increases aren’t being passed on to consumers of other products. April will likely see a larger increase in fuel prices than in March and it can take six months or more for fuel prices to show up in core CPI. So celebrations are premature.

If the fighting in Iran does resume, I expect oil prices will go much higher than they did last month. If it doesn’t, then I think the net effect of the war will have been to add another reason for most central banks to raise interest rates.

Meanwhile, Taiwan’s trade data — like South Korea’s earlier — tell us the US investment engine of growth survived the first month of the war in robust form. CPI reports from the region showed that oil price passthrough doesn’t necessarily lead to higher inflation immediately, but April will likely see a higher rise in fuel prices in the CPI data. Three central banks held policy meetings — one gave us a textbook lesson in how central banks should respond to an oil shock. How with the Fed respond? It appears they are willing to run the risk of repeating their errors of the 1970s.

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Trump’s expletive-laden Truth on Sunday — “Tuesday will be Power Plant Day, and Bridge Day, all wrapped up in one, in Iran. There will be nothing like it!!! Open the Fuckin' Strait, you crazy bastards, or you'll be living in Hell” — seemed to extend by another day the deadline he’d given to Iran to open the Strait to all traffic. The language suggests again that it is he, more than Iran’s leaders, who is feeling the pressure of this war.

Escalation seems the most likely path forward but Trump does keep extending deadlines suggesting either the US us not ready or he is unwilling to take the next step. The key for markets, though, is how much oil flows out. If Trump doesn’t deliver on his threats and oil flows increase, markets will continue to rally.

In this week’s note, I’ll show how much pain consumers in Asia Pacific are feeling when they fill their tanks. Petrol prices in most economies are up more than 20% since the war began — in some places gasoline is up about 50% and diesel has about doubled. Where prices aren’t rising — and even in some places where they are — governments are facing sharply higher subsidy costs.

I’ll then review the impact of Trump’s Liberation Day tariffs, which were announced a year ago last Thursday. Finally, inflation reports from four countries last week, the first to include March data, showed energy price increases putting pressure on perhaps only one of those countries’ central banks.

Let’s dig in…

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With his war on Iran now a month old, we’re still none the wiser about President Trump’s intentions. On one hand, he describes the war as essentially over — “militarily won” — but on the other hand he’s sending more soldiers to the region. Soldiers, not sailors, suggesting ‘boots on the ground’. He has set — and deferred — deadlines for Iran to completely re-open the Strait of Hormuz, leading many observers to suggest it is he, more than the Iranian government, who is desperately looking for a way to end the conflict. Iran, meanwhile, is reopening the Strait — to non-US or Israeli (or allied country) ships and for a fee.

I said at the outset that we’d know the war was over only when both sides said it was, and we’re not nearly there yet. In the meantime, I continue on the assumption that almost everything I read or hear about the conflict is propaganda from one side or the other. I am therefore more inclined to believe markets. But both of those developments described in the previous paragraph are bullish as they suggest that the risks to energy trade may be receding. And markets are responding. Of course, the war doesn’t have to end for oil and gas to flow through the Straits, but a war that doesn’t halt energy flows could become a war that markets ignore.

Crude oil futures fell last week for the first time since the war began. I said last week that Dubai futures were sending an exaggerated view of oil shortage since with the Strait all but closed delivery on the contract was very challenged. But as Iran sent signals last week that they would allow more ships to pass through the Strait, the June Dubai crude futures price plunged by 37%. But futures prices in Shanghai and Tokyo and in the ICE exchange for Brent oil also fell — much more modestly — last week. Futures prices are still up about 40% since the war began, but they’re heading in the right direction.

The right direction, at least, for energy importers and for investors. Investors are by now well aware that equity markets are simply taking their cue from oil prices — even in oil exporting countries. Since March 2, the correlation of daily changes in US equities and Brent crude is -0.67 (higher/lower oil prices almost always coinciding with lower/higher equities). During February the correlation was 0.1.

A close, but not perfect, correlation. So, while oil prices fell slightly last week, equities were still down in most markets.

Asian governments choose between inflation and deficits

A cumulative 40% or more increase in oil prices is enough to cause havoc with retail energy markets, especially in Asia where more than 80% of Gulf oil and gas goes — and for whom Gulf oil and gas are by far their largest sources of energy imports. Most governments are allowing the higher crude oil prices to be passed on to consumers at least to some extent. But most are also increasing subsidies to try to limit the extent of passthrough. So the cost of subsidies is rising governments face greater pressure to increase the passthrough of crude oil prices to consumers.

In this section of this week’s Talking Points, I’ll summarize how governments have responded to the rise in crude oil prices — how much is this being passed on to consumers or absorbed by the government, with consequent increases in fiscal deficits.

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Already, through the course of last week, as it became clear that the US Navy was not, in fact, escorting oil tankers through the Strait of Hormuz, crude oil prices rose to above USD100/bbl from about USD88 where they’d settled at the close on Monday. It is in Iran’s interest that prices continue to rise, not only to earn more income but because an oil crisis is more likely to convince Trump to end the war than entreaties from Iran’s leaders.

Hence the significance of the attack on Fujairah. It is the UAE’s main oil transshipment point on the Gulf of Oman and therefore offered, until yesterday, a route around the Strait of Hormuz for some of the stranded oil.

It is a strange military tactic to hold back from attacking your adversary’s primary source of revenue while claiming to be aiming for their total destruction. This was not the US strategy during the first Gulf War in 1990 when both Iraq (against Kuwait) and the US deliberately targeted oil infrastructure. But by 2003 and the second Gulf War, Bush Jr avoided striking oil infrastructure because he wanted both to limit the blowback to the US consumer and also to preserve a key source of revenues for a successor government in Iraq.

This sensitivity around oil points to Trump’s vital weakness in this conflict: he wants to avoid a spike in oil prices that would further erode US voters’ support for the war — and for the Republican party at the midterms. So, while the US and Israel bomb targets all over Iran, they have allowed Iran to continue to export oil.

But the US has not been able to reopen the Strait to other traffic. From nearly 100 ships a day in February, the most recent data show only about five ships a day making the passage. Iran has threatened any US or allied country ships with destruction, while allowing cargo bound for China and India to pass. Trump is now calling on other countries to aid the US Navy in reopening the Strait, an offer that is unlikely to find many takers. China doesn’t need to help and Trump’s request puts Japan and South Korea in a tricky position. The US is already weakening their defenses by moving resources like the THAAD in South Korea to the Gulf and now he wants them to send their Navies to support the US in an unpopular war.

Instead, more countries may try follow China and India in negotiating safe passage for their cargo by agreeing not to assist the US, but again it’s not actually in Iran’s interest to grant their requests unless they offer genuine assistance to Iran’s war effort.

China has a chokehold on global rare earths and magnets and was able to exploit their advantage to get Trump to back down on the trade war. Iran has a chokehold on 20% of the world’s oil trade and they hope to force Trump to back down on his real war. I fear it’ll take more than USD120/bbl oil to convince Trump to change tack, though.

Even if oil hits USD120/bbl this week, that’d put it up 69%yoy or nearly 100%ytd, by no means an unprecedented shock. To be sure, the 2021-22 experience with a doubling of oil prices was not a happy one — the Fed would most likely hike rates more quickly than it did after the pandemic — but the economy weathered similar oil price shocks in 2008, 2010 and 2019 better. Trump will not be happy with oil prices that high, but his response may be to redouble efforts to win the war rather than to look for a way to back out of it.

IEA agrees to the largest-ever release of strategic reserves

In response to the spike in oil prices, and after initially saying that a release of oil from the US Strategic Petroleum Reserve wasn’t needed, the US and other International Energy Agency members agreed on Wednesday to release 412mn barrels of oil and oil equivalent products from government and private sector reserves.

On the face of it, this could replace the frozen Middle East supply for more than 40 days, since the IEA estimates that about 10mn b/d of Gulf oil is cut off by the effective closure of the Strait of Hormuz. But only about a quarter of the release will be from reserves in Asia Pacific while this region accounts for 90% or more of the oil and product shipped through the Strait of Hormuz. Gulf oil accounts for about 35% of Asian refinery supply. So relief for Asian importers will, after a couple of weeks, have to come from shipments from other regions or a further draw down of reserves.

Most Asia Pacific economies, especially the largest importers — China, Japan and South Korea — are believed to have sufficient domestic reserves of crude oil and products in storage to last a couple of months.

The most immediate concern is Indian imports of LPG because this is widely — and mainly — used as home cooking fuel and there are no appreciable domestic stocks in reserve. So available retail supply and a small amount of product still not offloaded from carriers will rapidly run out. It will take a few weeks at least to arrange new supplies from the US or, less likely, other producers with spare capacity.

Oil prices are driving markets

I said last week that oil prices were the most important data for investors to monitor. That proved correct. Whereas previously markets had largely ignored — admittedly much smaller — fluctuations in oil prices, since the war began US equities (and therefore global equities) have moved almost in lockstep with oil prices. So as Iran threatens regional oil infrastructure and the US seems unable to keep the oil flowing through the Strait. I expect oil prices to rise, and equities to fall, in the coming days.

So far, the US bond market is treating the war as more of an inflationary shock than a growth shock. Not unreasonable, given the US’ position as an energy exporter. Since the war began, 10yr breakeven inflation is up 11bps (5yr b/e is up 21bps) while the real yield has risen 20bps. Meanwhile the USD index versus other major currencies has risen 2.8% to a ten-month high.

How will central bankers respond?

This coming week sees monetary policy decisions in Australia, Indonesia, Canada, the US, Japan, Taiwan and the Euro Area, and probably others I’m less interested in.

Ordinarily, the advice to central banks faced with a deflationary shock is to ‘look through’ the oil price increase but be prepared to raise rates if higher energy costs appear to be passed on to consumers and show up in higher core inflation.

I think most central bankers would agree that they ‘looked through’ the commodity price (and supply chain) shock for too long after the pandemic. I expect that, especially in non-combatant economies outside the Middle East, at a point where inflation risks were already turning upwards even before this war began, the upside risks to inflation will be perceived to be of greater concern than the downside risks to growth.

In practical terms, I think this means the Reserve Bank of Australia will raise its cash rate this Monday. I expect the Bank of Canada will strike a surprisingly hawkish tone on Thursday but not hike rates just yet. Likewise, I expect central banks in Indonesia, Taiwan and the European Central Bank to keep rates unchanged.

For the Fed, with benign CPI and PCE readings last week, the pressure to hike rates is much less at the moment. But the opportunity to cut rates is rapidly disappearing. Since the war began, the December Fed funds future has risen by 39bps to only 20bps below the current EFFR. Not even one rate cut this year is fully priced in now, the least amount of easing expected since Feb 2025.

Which leaves the Bank of Japan. With inflation falling recently and the Prime Minister making fairly public her opposition to rate hikes, I expect the BoJ to keep rates unchanged this week.

China’s inflation rises

As we start getting February data, we can get a cleaner view of the state of the economy. As I’d suggested when the January CPI was released, underlying inflation continues to creep higher. Headline inflation was unchanged at 0.8% in Jan/Feb as in December and up from -0.1% a year ago. CPI excluding food and energy rose to 1.3%yoy in Jan/Feb versus 1.2% in the preceding three months. This is the highest core inflation rate since October 2021.

The government raised the ceiling prices for gasoline and diesel last week by about 8%. But that put the price up only about 1.5%yoy. That’s a smaller increase than their pricing mechanism would normally have implied. The regulated price caps are re-set each Tuesday and follow crude oil prices, allowing for (fixed) refining and other margins. Had they followed the formula, they’d have probably raised prices by about 10%yoy. I notice that the NBS hasn’t provided the CPI index for motor fuel since December, so it looks like the government is going to insulate consumers from the war shock by raising retail prices much more slowly than they otherwise would have.

The People’s Bank also published credit data last week and they told a more familiar story. Total social financing continues to slow down, led especially by lending to households which has essentially stopped growing.

Growth in credit to non-financial firms looks like it might have bottomed out late last year but overall credit growth remains very weak. Total social financing excluding government bonds rose 5.9%yoy in February. It has ranged between 5.8% and 6.0% for 12 months now.

The counterpart to stagnant loan growth is that households’ liquidity position continues to improve. With household deposits rising 8%, albeit slowing, the loan/deposit ratio has fallen from 0.7 in 2021 to 0.5 today. It has been ten years since it was this low. There’s nothing stopping it from falling further except a willingness to take on more debt. And that’s a confidence question more than anything else.

It’s no surprise that household gearing peaked at the same time as property prices. Falling property prices have discouraged households from buying more property and as prospects that the market will recover wane, households are returning to deposits and equities as investments.

APAC exports continue to grow rapidly

Chinese trade data reported last week surprised very much to the upside. Exports rose 21.8%yoy in Jan/Feb, up from 3.8% in Q4 and the highest growth in four years. Despite the new year’s holiday, exports in February were up 40%yoy. Imports were up only slighly less than exports — by 20% in Jan/Feb — bringing the two-month trade surplus up by more than one-quarter, to USD214bn.

Exports to the US continued to decline, but only by 11%yoy — an improvement from Q4’s 29% fall. And this isn’t becuase exports to the US were particularly weak in early 2025. If anything there was a pre-tariff boost to US imports. Chinese exports to Japan rose 8.8%yoy (versus 1.2% in Q4) and exports to APAC ex-Japan rose 29% (12%). Most noticeably, exports to the EU plus UK rose 28%, up from 9% in Q4.

It’s tempting, of course, to say that this surge in exports reflects weak demand at home and firms’ desperation to offload surplus inventory abroad. And no doubt that’s part of the story. Passenger car sales in China, for example, are now falling because government subsidies are being withdrawn and so many people upgraded in the last few years when subsidies were available. Exports of passenger cars, especially new electric vehicles, are surging. But that’s not just a consequence of weak domestic demand. There is a growing awareness abroad, especially in emerging market economies, that the Chinese cars simply offer better value than their European or US competitors.

And the China dumping thesis is refuted also by the strength in other countries’ exports. Taiwan, for example, reported last week that its exports rose 44.5%yoy in Jan/Feb, down only slightly from 49% in Q4. Exports to the US actually slowed quite markedly — to 83%yoy from 147% in Q4 — while exports to China (19% vs 5% in Q4), the EU&UK (77% vs 41%) and other APAC economies (34% vs 24%) all grew much more quickly than they had in Q4.

Taiwan’s exports of semiconductors and other electronics equipment rose 114%yoy in Jan/Feb. That’s much lower than the 216% growth in Q4 but obviously still a very impressive figure. And recall that South Korea had earlier reported very strong growth in exports in Jan/Feb. Total semiconductor exports rose 131%yoy in Jan/Feb, up from 36% in Q4. Exports of electronics and electrical equipment to the US rose 93%, up from 3%. Total exports to the US were up 30% in Jan/Feb after having fallen 4% in Q4. A similar story was reported for exports to the EU&UK, which rose 9% after having fallen 1% in Q4.

The impression so far is that US demand for ICT products continues to grow strongly — probably accelerating — in Jan/Feb and that demand in Europe and other regions also looks to be picking up. This is very favourable for a region of small open economies, but of course the Iran War poses a threat to this growth if energy prices continue to rise.

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A quick look at markets

I’ve already provided a quick summary of US markets above. US stocks lost 1.6% last week but most APAC markets were much worse off. China managed to eke out a small gain last week as the Two Sessions wound up amid positive talk of reform, if not stimulus. I expect China will lose that ideosyncracy this week and follow other markets down, barring some positive miracle in the Middle East.

Not all markets were terribly badly hit; Taiwan (strong exports) and Thailand (still not widely held?) were only down a little last week. But Indonesia and India took heavy losses, while the Philippines, Vietnam and Hong Kong were down ‘only’ about 3.5%.

Since the outbreak of the war in Iran, global equities have lost 5.7%. The US has been a relative outperformer, down only 3.8%, while Japan has lost 7.8% and Asia ex-Japan is down 6.6%. Indonesia has been the worst hit by the loss of risk appetite despite its status as a net oil and gas exporter. Already suffering from the threatened MSCI downgrade, concerns about the fiscal cost of fuel subsidies adding to an already expansionary fiscal stance have provided additional impetus to selling. The South Korean market has been almost as badly hit, which I attribute to its status as the best performing market in the region over the past year. Australia, another energy exporter has also seen large declines since the outbreak of the war.

I noted above that the US bond market is treating the war as more of an upward shock to inflation than a downward shock to growth. The 10yr Treasury yield rose 13bps last week but that was mainly due to rising real yields. Breakeven inflation, which had jumped 10bps the previous week, were only 1bps higher last week.

Most APAC markets saw smaller increases in bond yields last week, but the Philippines (31bps), Indonesia (21bps) and New Zealand (20bps) sold off dramatically. Since the outbreak of the war, the Philippine bond yield has soared 70bps, testament to the poor liquidity in that market. But even the US, Canadian and European bond markets have seen yields rise more than 30bps since the outbreak of the war. Australian and New Zealand yields have risen 30bps and 36bps, respectively, while South Korean bonds have seen yields rise 26bps.

But in India, China, Taiwan, Malaysia, Japan and Singapore, investors have been relatively insulated from the bond market shock, with yields actually falling slightly in India and rising relatively modestly in the other economies.

I noted last week that the USD was once again acting as a safe haven, and this has been borne out again over the past week. Most APAC currencies were weaker against the dollar — the Philippine peso especially so — although the AUD and MYR did eke out small gains.

But since the outbreak of the war, the dollar has strengthened against every currency in APAC, even the CNY. The withdrawal of foreign investors from the plunging South Korean equity market has taken that currency down nearly 4% since the outbreak of hostilities, while the Thai baht and Philippine peso have lost about 3.5%. The euro has also been particularly hard hit.

As I noted above, the USD has strengthened by 2.8% against other major non-EM currencies since the outbreak of the war; it has gained about 0.5% against the CNY, ending a steady (cumulative 6.7%) appreciation of the CNY against the dollar since April of last year.

With oil prices shooting up and investors treating this as more of an inflation shock than a growth shock, it was slightly surprising to see gold prices drop about 2% last week. Bitcoin, following the USD index has it has since the beginning of the year, was up 4.2% last week.

What to watch this week

Oil prices will likely continue to set the tone for markets this week, but as I noted above it will be a busy week for central bankers with monetary policy meetings in Australia, Indonesia, Canada, the US, Japan, Taiwan and Frankfurt. The Reserve Bank of Australia will probably be the only central bank to act on the rising inflation threat by hiking rates this week but it will be very interesting to see whether the other central banks signal that they too see the higher energy prices as more of a concern than the downside risks to growth.

We’ll get China’s monthly data dump from the NBS — retail sales, industrial production, and fixed assets investment — on Monday. Japanese trade data and machinery orders, and the February inflation rate in Malaysia will also be worth watching. But other than the war and oil, I think the focus will be on central bank messaging.

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Operation Epic Fury/Lion’s Roar has already resulted in a 30% increase in crude oil prices and US gasoline prices have risen more than 10% already. Jet fuel prices are under particularly intense pressure. The Strait of Hormuz is almost closed — a tiny number of oil carriers (notably those with oil bound for China) have gotten through. President Trump has reversed course on Indian purchases of Russian oil, allowing them to buy Russian oil that is already seaborne and Treasury Secretary Bessent has said that they may ‘unsanction’ other purchases of Russian oil. Russia, the country that is allegedly providing intelligence on US military targets in the Middle East to Iran.

Dipping into the government’s Strategic Petroleum Reserve has been ruled out, for now, because the reserve is already very low. President Biden had brought the SPR down by nearly half between 2021 and mid-2023 as oil prices rebounded after the pandemic. He began, slowly, replenishing the reserve after mid-2023 and Trump continued that very gradual process after taking office. The result though is that the SPR is still about 40% below its post-Covid peak and those 413mn bbls represent only about 20 days’ consumption versus the 30 days it had held since 1985.

So concerned is the White House that they are reportedly investigating other ways to lower gasoline prices — increasing ethanol blends, lowering gasoline taxes — as retail prices rise sharply.

Crude oil prices had been rising since the beginning of the year and by February 26 they had risen by 17% from the January 7 low. They’re now up 52%ytd and 33% yoy. This is the highest increase in oil prices since the summer of 2022 — when US CPI inflation hit 9%.

Futures markets indicate that traders expect the spike in oil prices to be reasonably short-lived. Brent futures are still at USD80/bbl in July but by April next year futures prices are back to the pre-attack level of about USD71.

The spike up in oil prices has an obvious inflationary impact and this was reflected in breakeven inflation rates last week. But here too, the implication is that the inflation shock will be short-lived. The 5yr breakeven inflation rate rose by 16bps last week; the 10yr breakeven rose by 10bps and the 30yr breakeven was nearly unchanged.

The jump in near-term inflation risks was reflected also in a rise in implied Fed funds rates in 2027. The December Fed fund future rose by 19bps last week; the futures market now has only one rate cut fully priced in this year and one more next year.

What worked for investors last week? As I’ll document below, equities and bonds both sold off on the geopolitical and inflation risks, but the dollar proved again to be a safe haven. All Asia Pacific currencies (ex-HKD) depreciated against the USD last week and the ICE’s dollar index (against major currencies) rose 1.5%, the largest weekly increase since July last year. Interestingly, during the “12 day war”, the ICE index was very marginally lower.

As the chart above indicates, gold didn’t do well last week despite the rise in inflation expectations. Gold fell about 2% last week — silver lost about 9% — but bitcoin rose 3.4%. Bitcoin has moved somewhat closely with the dollar index since the beginning of the year — as it had for most of 2024 and 2025 until Liberation Day. But as oil prices surged late in the week, bitcoin actually fell and has continued to fall over the weekend. The dollar — or a USD stablecoin — was a better hedge against inflation than bitcoin or gold last week.

China’s Two Sessions offers no stimulus

The war in the Middle East has rather overshadowed the annual Two Sessions (of the NPC and CPPCC) in Beijing which will continue yet for a few more days. But it’s also partly because at least so far there have been no big surprises from the CPC. Premier Li Qiang gave the Government Work Report on Thursday and perhaps the most notable fact was that, as expected, the government is aiming for GDP growth of 4.5% - 5.0%.

This is a significant, but not large, step down from the perennial 5% target but is still consistent with the goal of doubling real GDP between 2020 and 2035. With real GDP having increased by 30% over the past five years, they only need growth of 4.4% each year from now on to reach their 2035 goal.

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So he must surely be hoping his assault on Iran can be finished as quickly as his decapitation of the Venezuelan regime was, or at least no longer than last year’s “12 day war”. I suppose we all hope so. I fear he’ll be disappointed though. Iran has broadened the scope of its response, threatening a regional conflagration and signaling, perhaps, that they see this as a battle for survival not just another in a sequence of attacks. Trump wants regime change in Iran, but the Iranian people can’t topple the regime unless it has been utterly defeated on the battlefield. That’ll take weeks of arial bombardment and, probably, boots on the ground.

A quieter battle is brewing, once again, between the government of Japan and its central bank. When Takaichi Sanae was elected LDP leader, many observers wondered whether she would give the Bank of Japan free rein to keep raising interest rates even while she pursued new fiscal stimulus. That question has, I think, been resolved. A leaked expression of “reservation” about the wisdom of hiking rates and the nomination of two clear doves to the BoJ Board proclaim loudly, I think, that the Prime Minister wants the BoJ to stop hiking rates. Without political cover, I think the BoJ will find it very difficult to raise rates again unless and until inflation is re-accelerating.

China’s Two Sessions get underway this week. Most important will be the release of the 15th Five Year Plan. There are unlikely to be many surprises in that document, but the formal adoption of the plan effectively gives government officials at every level their objectives and marching orders. I’ll be looking for evidence on how they’re planning to finance the investments in “new productive forces” beyond what has already been committed. We’ll also get the Government Work Report for 2026, which is likely to target a sub-5% growth rate.

The Bank of Thailand cut its policy rates last week for the sixth time in 17 months — by a total of 150bps, as I’d expected. But they signaled that they don’t intend to continue, calling on the government to provide stimulus by other means if necessary. The Bank of Korea, conversely, hasn’t cut its policy rates since May of last year. Inflation has hovered around the BoK’s target but property price inflation continues to accelerate even while mortgage lending slows. So too equity prices continue to rise rapidly, drawing households into more speculative investments. The balance of risks is tipping in the direction of rate hikes in South Korea to try to stabilize asset prices.

Note that South Korea reported its February trade data today. Exports to the US rose 29.9%yoy, essentially the same as in January. This is the fastest growth since the post-Covid reopening in 2021 and provides more evidence that the US ICT investment surge continues in Q1. This single fact underpins global markets and represents potentially the greatest risk to Asian economies if it should falter.

Iran

In the long history of US efforts to prevent Iran obtaining nuclear weapons, tariffs were probably the least likely tool to work. The 25% tariff applied on imports from countries that trade with Iran was announced on February 6 as US and Iranian negotiators prepared to meet. This is a war of Trump’s making: by all accounts (other than his), Iran was complying with the JCPOA but Trump withdrew US support in 2018, starting Iran back down on the path to nuclear weapons which has led us to this point after Trump’s usual dealmaking strategy — threats and bluster — didn’t impress the Iranians.

Meanwhile, more of his supporters are wondering if Trump isn’t, when all is said and done, a conventional Republican president: tax cuts for the rich, spending cuts for the poor, and war in the Middle East. This is a risky war for domestic political reasons, not just geopolitical ones. Trump is gambling on a quick, decisive and (for Americans) bloodless, victory to bolster his ratings. If he doesn’t get it, the Republicans will pay dearly come the mid-terms.

Look elsewhere for your OSINT. “The first casualty of war”, etc. Don’t get caught up in the excitement of the first hours. Iran has already broadened the conflict to include countries hosting US forces in the region. They have more to lose than Trump and will fight as long as they can. Trump is overtly aiming for regime change, and not the Venezuelan type where the leader goes but the same corrupt regime stays. Trump has promised the Iranian people they will be able to overthrow their government when he’s done. While the US and Israel can, over time, probably destroy most Iranian military capabilities with air strikes, that doesn’t remove the government or the IRGC. That is likely to require ‘boots on the ground’ something Trump and his supporters are loathe to do.

What does this mean for Asia Pacific? The most immediate risk is from higher oil prices. Crude oil has already risen more than 20% since the beginning of the year and will likely jump higher on Monday. China will have to replace some 1.4mn - 1.8mn bb/d of supply (this had risen to about 2.2mn bbl/d recently) while the Strait of Hormuz, even if not completely closed, will likely see drastically lower traffic out of caution. OPEC have agreed to increase production from April onwards by 206,000 bbl/d not enough to replace Iranian exports.

So oil and petroleum product prices will rise. Credible guesses say we can expect USD100/bbl soon. Whereas energy has been a deflationary factor for the past 18 months as oil prices fell, it will now be an inflationary factor. Crude oil at USD100/bbl in March would by nearly 40% higher than a year ago.

The increase in oil and gas prices will benefit Australia, Indonesia and Malaysia, which are modest net exporters, but tax the rest of the region, especially Thailand. (To some extent this chart exaggerates the exposure of some countries by not including net exports of petrochemicals and other products for which gas is a feedstock but aren’t classified as oil and gas products.)

But even where countries are net exporters, and generally where they are importers, a rise in the world prices of oil and gas may be passed on to consumers. The greater the reliance on imports and the smaller the tax imposed on petroleum, the greater is the potential passthrough unless governments choose not to allow retail prices to rise, in which case there will be a commensurate rise in the fiscal deficit.

The estimated passthrough to consumers is greatest in the Philippines, Singapore, and Australia. By contrast in Indonesia, Malaysia and India, consumer prices don’t vary much in response to oil price shocks. The low sensitivity of consumer prices in Hong Kong reflects the high tax burden on petrol, which dampens the effect of fluctuations in crude oil.

So a spike in crude oil (and gas) prices in response to the war in the Middle East will increase the oil and gas import bill — manageable in a region of mostly trade surplus economies — but tax consumers to the extent the shock is passed on to them. India and the Philippines, with persistent and large trade deficits, face probably the biggest risk to currency stability. The Philippines is also probably the most exposed to a domestic inflation shock.

The longer the conflict goes on, the greater these costs will be.

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China’s Two Sessions start this week

Iran will likely dominate investor attention outside Asia this week, but China’s annual NPC/CPPCC meetings will begin on Wednesday (CPPCC) and Thursday (NPC) and run probably for a week. Hopefully, events in the Middle East will allow us to focus some attention on these meetings because they are particularly important this year.

Most important, the 15th Five Year Plan will be presented. We know much already about the likely contents, including from the Recommendations of the Central Committee released last October and it’s unlikely the final Plan will deviate much from that document. But the Two Sessions will give every official in China their new objectives and will sanction financing for new projects and priorities.

The 15th FYP starts from the perspective that the previous drivers of growth in China — property and export-oriented industries — are weak and rather than try to revive them the focus should be on “new productive forces”. That is, new technologies and new industries to drive higher productivity growth so that real GDP growth per capita can be maintained. This is the goal all countries have, but it is the unrelenting focus of this government.

As in the US, an important part of the promotion of new technologies is to achieve technological self-sufficiency. While the FYP will talk about partnering with other countries and promoting two-way FDI, the reality is that the government expects that China must win the battle for technological supremacy by itself. So I’ll be looking at how they intend to finance all this new investment.

At the same time and with a shorter horizon, the Government Work Report will set out objectives for 2026. This report may for the first time set a goal for GDP growth below 5%. Even if the new target is 4.5% - 5.0% or “close to 5%”, the message is that fiscal or monetary stimulus will not be needed in the near-term, only if the economy slows sharply. As I’ve been saying for a while, with core inflation rising, the PBoC will be much less inclined to ease monetary policy significantly. But on the fiscal front, I think the government will be counting on financing of new FYP priorities providing a new growth impulse rather than tax cuts or more handouts to consumers.

I expect consumption growth to be a priority of the FYP; it won’t just be about new technologies and industries. I think we may see new policies to raise the social safety net — childcare and elder-care facilities, pension reform, etc — to try to reduce the precautionary savings motive.

But broadly, the message will be that the government will continue to look to newly emerging industries and technologies to boost growth rather than trying to prop up the property market or subsidise consumption or cutting interest rates to encourage new borrowing by old industries.

Takaichi takes on the BoJ

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