According to insights from Prudential (PGIM), Daleep Singh, Vice Chairman and Chief Global Economist, commented on the potential for a ceasefire in the Iran conflict, AI-driven growth, and the economic impact of policy shifts by major central banks. He noted that while the first half of 2026 is volatile, investors will still face several key issues in the second half. Among these, the ultimate outcome of the Iran situation remains one of the most closely watched topics.
There remains significant scope for the US and Iran to reach an agreement similar to the 2015 Joint Comprehensive Plan of Action (JCPOA). The potential deal's scope could include: a phased lifting of sanctions (e.g., first energy, then financial) in exchange for a staged reopening of the Strait of Hormuz; handling Iran's enriched uranium stockpile (e.g., setting enrichment limits, suspending enrichment activities, or transferring highly enriched uranium to a third country); and a continued US military presence in the region without seeking regime change.
As the agreement may be implemented in phases, energy prices are expected to continue reflecting a certain risk premium. The base case scenario anticipates Brent crude oil prices will remain within a range of $80 to $100 per barrel.
Based on the scale of AI-related capital expenditure, consumption driven by wealth effects, and the continued stimulative role of fiscal policy, PGIM maintains its expectation for relatively high US nominal GDP growth in the second half of the year.
The base case scenario projects the Federal Reserve will cut interest rates three times over the next 12 months, each by 25 basis points, but this is contingent on the following prerequisites: a decline in inflation (with core PCE or other inflation metrics falling to 3% or below), a labor market moving towards balance (with labor demand growth below supply growth and wage growth slower than productivity growth), and sustained productivity growth above 2.5%.
The primary risk deviating from this base case is that the Fed may keep the federal funds rate within the current 3.50% to 3.75% range, rather than restarting a hiking cycle.
In contrast, the European Central Bank is expected to potentially raise rates twice in the coming months based on prudent considerations, with a possible pivot to rate cuts in 2027. Meanwhile, the Bank of Japan may also raise rates twice before the end of the year.
Despite Japan's overall inflation rate remaining significantly below 2%, the central bank is likely to hike rates in response to persistent yen weakness and pressure in the Japanese Government Bond market.
When seeking factors that could sustain or even strengthen the current favorable market environment, the most prominent is the productivity boost driven by AI, which helps cool inflation. This aligns with the market's understanding of the policy stance expected from the new Fed Chair, Kevin Warsh, and would facilitate a shift towards more accommodative monetary policy, initiating a new round of economic expansion driven by supply-side improvements.
On the other hand, factors that could dampen market sentiment include a slowdown in AI-related capital expenditure and a reversal of wealth effects. Supply-side shocks could also keep inflation elevated, presenting more significant downside risks.
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