MW The market, the Fed and the economy are ignoring war risks, says this strategist
By Jules Rimmer
Inflation is moving further away from the Fed's target, but they don't seem to have noticed
Aurora Research finds the U.S. economy, its stock markets and the Federal Reserve are all carrying on as if the Iranian war has no impact at this stage.
"I still think the Fed is wrong and they will have to hike this year, they just don't know it yet."
For five years now, the Fed has missed its 2% inflation target and it's quite clear to strategist Dimitris Valatsas that the trend is "up, up and further away" from that objective. "Inflation is barreling toward 3.5%" in this Friday's U.S. consumer price index datum release.
Valatsas, founder of Aurora Macro Strategies, a geopolitical risk advisory boutique, is surprised by the relatively unconcerned approach of Federal Reserve officials, like Chair Jerome Powell and New York Fed President John Williams, whose recent commentary seems oblivious to the fact that gas prices across the U.S. now average $4.10 per gallon, up by a third in the last month.
Williams, Valatsas notes, predicted the inflationary impact of the oil price (WBS.1) shock "should partially reverse later this year, assuming oil prices come down after hostilities cease." Valatsas observes "that's a lot of brave assumptions to be making, even for an economist."
It's not just the Fed fading the conflict's repercussions. So is the economy and so is the market. Valatsas highlighted the solid jobs growth of 178,000 in March, the fall in unemployment to 4.3% and the 3.5% increase in average hourly earnings. "The labor market is entirely unperturbed by developments in the Middle East," he adds.
Furthermore, the Institute for Supply Management monthly report pointed to a "healthy and advancing manufacturing economy" while "economic activity remains robust." For Valatsas, the economy is "barely noticing" an oil crisis is taking place.
ISM manufacturing PMI vs the prices paid index
For all the hullabaloo, the markets aren't reacting much differently.
Last week, amid the geopolitical turbulence, the U.S. equity markets SPX ground out a 1.6% rise, while European stocks XX:SXXP also rose and Treasury yields fell. Valtsas makes the important point that both the U.K. UK:UKX and Japanese stock markets JP:NIK are in positive territory in 2026 despite their position right at the very epicenter of the Iranian war's economic fallout, due to their precarious fiscal positions and external energy dependency.
For Aurora, the widening of the bombing campaign and the prospect of boots on the ground remain key risks to all of the market's calmness and complacency. Aurora expects Iran's red lines to harden and meanwhile President Trump needs a face-saving outcome ahead of the November midterm elections.
Aurora warns: all scenarios "carry significant downside risk."
-Jules Rimmer
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(END) Dow Jones Newswires
April 07, 2026 07:03 ET (11:03 GMT)
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