Operation Epic Fury is now in its 30th day. The week’s dominant variable has been the simultaneous pursuit of a diplomatic off-ramp and an escalating U.S. ground force posture. Signs are trending towards the latter as Iran rejected the Trump Administration’s 15-point peace plan and launched its most serious attack yet on a U.S. base in Saudi Arabia on Friday evening. Meanwhile, Iran’s Houthi proxies have entered the war for the first time. While diplomatic and military tracks are accelerating together, both cannot be true for long.
On the trade front, USMCA technical talks continue between the U.S. and Mexico as the July 1 Joint Review deadline approaches. President Trump’s Beijing summit with President Xi Jinping has been rescheduled for May 14-15.
GEOPOLITICAL UPDATE
War Progression
A diplomatic solution to the war began taking shape on March 19 when diplomats from Egypt, Saudi Arabia, Turkey, and Pakistan met in Riyadh to explore an off-ramp and identify a negotiating partner inside Iran. Egyptian intelligence subsequently opened a direct line to the Iranian Revolutionary Guard Corps (IRGC), proposing a five-day ceasefire window and a neutral committee to oversee the Strait of Hormuz. Messages continued to be exchanged last weekend, with France, Oman, Qatar, and the U.K. participating.
Last Sunday, Egypt’s Foreign Minister Badr Abdelatty held a series of phone calls with his counterparts from Turkey (Hakan Fidan), Pakistan (Mohammad Ishaq Dar), and Iran (Abbas Araghchi), as well as with U.S. Special Envoy Steve Witkoff. President Trump separately spoke with Pakistan’s military chief of staff, General Asim Munir, a country he has grown closer with in his second term. This past Monday, Pakistan’s Dar and Turkey’s Fidan both spoke directly with Araghchi. On Tuesday, Iranian media reported that Iranian President Masoud Pezeshkian and Pakistan Prime Minister Shehbaz Sharif had spoken.
The pace of engagement pointed toward an in-person meeting between all parties, with Pakistan acting as the facilitator. Turkey’s state-run Anadolu Agency went so far as to state publicly on Monday that a U.S. delegation was expected to arrive in Pakistan “in a day or two.” Pakistan’s Sharif posted on X Tuesday that Pakistan “stands ready and honored to be the host to facilitate meaningful and conclusive talks for a comprehensive settlement,” subject to concurrence from both sides.
President Trump, seemingly energetic to pursue the diplomatic resolution, extended his original 48-hour power plant ultimatum by five days on Monday, citing “very good and productive conversations.” He then extended the deadline further on Thursday by another ten days (April 6). In a Fox News interview he explained his rationale for the second extension, saying that Iran had given him “ships,” a reference to roughly ten tankers that Iran allowed through Hormuz as a show of good faith.
The New York Times first reported that a peace plan developed by the U.S. had been delivered to the Iranians via Pakistan. At a Cabinet meeting on Thursday, Special Envoy Witkoff publicly confirmed for the first time that the U.S. had delivered a “15-point action list” to Iran as the framework for a peace deal. The terms as reported by the Wall Street Journal are demanding: dismantling Iran’s three main nuclear sites, ending enrichment on Iranian soil, suspending the ballistic missile program, curbing regional proxy support, and fully reopening Hormuz. If met, the demands would result in sanctions relief for Iran and U.S. assistance with Iran’s civilian nuclear program at Bushehr.
Witkoff told President Trump the Iranians had agreed on several key points, including surrendering their stockpile of highly enriched uranium, though it remains unclear whether anyone with actual authority in Tehran made that offer. Iran’s counter, a five-point proposal, demanded war reparations, recognition of Iranian sovereignty over the Strait, and the withdrawal of all U.S. forces from the Middle East. None of those terms are acceptable to the American side.
The contradiction between Iran’s public posture and its private engagement reflects evidence of an internal power struggle within the Regime. On one side, the Islamic Revolutionary Guard Corps (IRGC), parliament speaker Mohammad Bagher Ghalibaf, and the Foreign Ministry all publicly denied negotiations were taking place. Ghalibaf accused President Trump of trying to “manipulate financial and oil markets” via his Truth Social posts. Yet on the other side, Foreign Minister Abbas Araghchi’s participation in multilateral phone calls is confirmed.
Iranian state television’s declaration that Trump “backed down following Iran’s firm warning” is messaging directed at the domestic audience, not the negotiating table. With new Supreme Leader Ayatollah Mojtaba Khamenei still not seen publicly, it remains unclear who in the regime has the authority to deliver a binding deal. U.S. officials privately acknowledge the Iranian government is in chaos and struggling to communicate internally.
Despite these contradictions, diplomatic hopes continued with top diplomats from Saudi Arabia, Egypt, and Turkey meeting today in Pakistan to discuss a potential cease-fire in the region. This also includes revisiting the consortium proposal to manage traffic through the Strait of Hormuz. Saudi officials emerged from the meeting still showing their hardline cards, insisting on guarantees that Iran’s ballistic missile program and proxy group support must be eliminated (more on that below).
On the U.S./Israel military solution side, U.S. Central Command’s last update confirmed over 11,000 Iranian targets struck, including over 150 vessels damaged or destroyed. Meanwhile, Israel’s Mossad has effectively penetrated the Iranian security apparatus, a material factor in both military targeting and reading the seriousness of the diplomatic overtures.
Israel’s ability to locate and eliminate senior commanders throughout the war continues, with its latest hit coming against IRGC Navy Commander Alireza Tangsiri, the officer responsible for the Hormuz mining and blockade operation. That said, the infrastructure Tangsiri built-limpet mines, passage protocols, and a tolling framework-remains operational without him. The U.S. confirmed as much, publicly acknowledging that Iranian Maham 3 and Maham 7 limpet mines have been laid in the Strait.
Iranian Escalations
The military option remains at the forefront in large part because of Iranian escalations. The recent Diego Garcia strike attempt is the most strategically significant. Iran fired two intermediate-range ballistic missiles (IRBMs) at the joint U.S.-U.K. base in the Chagos Islands, roughly 2,500 miles from Iran. Analysts noted that Iran lacks satellite coverage of the Indian Ocean, meaning the targeting intelligence almost certainly came from Russia or China, a finding that brings new friction to the upcoming Trump/Xi summit in May (more on that below).
The Diego Garcia strike is the first confirmed operational deployment of Iranian IRBMs and reveals a range capability that Tehran had repeatedly denied. Prior to the strike, Iran’s Foreign Minister had publicly stated the regime had kept its missile range “intentionally below 2,000 km.” The Diego Garcia attempt invalidates his claim. Israel’s Chief of Staff noted the strategic implication directly: at 4,000 kilometers, the Iranian missile program can hit Berlin, Paris, and Rome.
The attempted strike prompted the U.K. to expand American base access. Prime Minister Kier Starmer’s office confirmed ministers had approved U.S. forces’ use of British bases at RAF Fairford and Diego Garcia for “specific and limited defensive operations,” including strikes on Iranian missile sites used in attacks on Strait shipping.
Further Iranian escalations occurred late Friday when at least 12 U.S. service members were injured in an Iranian strike on Prince Sultan Air Base in Saudi Arabia. At least two U.S. Air Force refueling aircraft were hit, as well as an E-3 Sentry. The E-3 Sentry acts an airborne warning system, helping track drones, missiles, and aircraft-allowing U.S. commanders to intercept threats while managing friendly aircraft. “It’s a huge deal,” according to retired Air Force Colonel John Venable, as “It hurts the U.S.’s ability to see what’s happening in the Gulf and maintain situational awareness.” The Wall Street Journal described the strike as one of the most serious breaches of American air defenses thus far.
Yesterday, Yemen’s Houthi rebels launched their first ballistic missile attack on Israel since the conflict began, targeting what they described as “sensitive Israeli military sites” in southern Israel. The Houthis had until now remained on the sidelines at Tehran’s request; the reversal signals Iran is now willing to open additional fronts. The significance is not the immediate military impact but the energy chokepoint threat: the Houthis control territory adjacent to the Bab el-Mandeb Strait. Closing this additional passage would compound the energy shock, shutting down the second most utilized passage for Middle Eastern energy.
Ground Forces
Amidst this backdrop and the ongoing diplomatic talks, the 31st Marine Expeditionary Unit (MEU), carrying approximately 3,500 sailors and Marines aboard the USS Tripoli, arrived in the Middle East. The 11th MEU via the USS Boxer is still en route to the region from San Diego, CA. A written deployment order has also been confirmed for a brigade combat team from the Army’s 82nd Airborne Division’s Immediate Response Force. The 82nd’s approximate 3,000 troops are capable of global deployment within 18 hours, with commanding general Major General Brandon Tegtmeier already ordered to deploy with his command element.
The Pentagon is now reported to be considering deploying up to 10,000 additional ground troops to the region, a figure that would represent a material escalation beyond the 82nd Airborne brigade already ordered. Former U.S. commanders told The New York Times that Marines, whose combat engineers can rapidly repair airfields, would likely lead an initial seizure of Kharg Island, with the 82nd Airborne rotating in for sustained occupation thereafter.
Secretary Rubio, however, said publicly the U.S. can achieve its objectives without ground troops. But the force structure being assembled is not ambiguous about the military option being prepared should diplomacy fail.
U.S./Israel/Arab Alliance
Outside allies and third-party governance bodies remain largely on the sidelines with the notable exception of U.S.-aligned Arab nations. U.N. Secretary-General António Guterres offered a sharp rebuke during the week, condemning all three parties simultaneously. According to Guterres, “this [war] has gone too far” and the U.S., Israel, and Iran are all responsible for “human suffering” and an “increasingly devastating” global economic impact. The statement is notable because it does not choose sides, in effect creating a moral equivalency between all three.
Meanwhile, the G7 foreign ministers met in France on Thursday and Friday. Despite divisions over the war, the group issued a joint statement calling for the “immediate cessation of attacks against civilians and civilian infrastructure” and affirming the “absolute necessity” of restoring free navigation in the Strait of Hormuz.
In private remarks to G7 counterparts, Secretary of State Marco Rubio said the war would continue for another two to four weeks. This is the first time a senior U.S. official has suggested the conflict would extend beyond the original four- to six-week timeframe. Rubio later clarified the U.S. was asking allies to prepare a post-conflict maritime task force for Hormuz, not an immediate wartime deployment.
France responded plainly: “This war is not ours.” France’s defense chief separately complained that U.S. allies had not been informed about the start of hostilities: “They have just decided to intervene in the Near and Middle East without notifying us.”
Amidst the UN and European pushback, the military alliance continues to harden between the U.S., Israel, and allied Arab nations. In fact, The New York Times reported that Saudi Crown Prince Mohammed bin Salman (MBS) has been pressing President Trump to continue the war, arguing the campaign presents a “historic opportunity” to remake the Middle East.
Both MBS and the United Arab Emirates (UAE) are pushing for complete destruction of Iran’s hardline government and its military capabilities. The Wall Street Journal confirmed the reporting, quoting Gulf officials directly: “The Gulf states are unified in their anger with Iran.” Saudi Foreign Minister Prince Faisal bin Farhan was blunt: “What little trust there was before has completely been shattered.”
The Saudi government has now allowed U.S. forces to utilize King Fahd Air Base, a significant reversal from Riyadh’s position early in the war. The UAE, meanwhile, is cracking down on Iranian-owned assets, shutting down the Iranian Hospital and Iranian Club in Dubai. Freezing Iranian assets in UAE banking institutions would be the logical next step and a particularly effective counter to continued Iranian operations (though potentially an exacerbation to the oil supply shock). Bahrain also appears to be moving toward direct participation, with aerial footage indicating the launch of ground-based missiles from within its borders.
Shipping
Much like Egypt’s consortium proposal, the Trump Administration’s “Hormuz Coalition” remains aspirational. No ally has publicly committed forces during active hostilities, prompting President Trump to shift responsibility on Truth Social earlier in the week: “The Hormuz Strait will have to be guarded and policed, as necessary, by other Nations who use it – The United States does not!”
In reality, traffic through Hormuz has bifurcated rather than entirely closed. Iran is selectively granting passage to non-belligerent vessels while blocking those tied to the U.S., Israel, or their allies; and is in the process of setting up an effective tolling booth apparatus.
Two Indian-flagged LPG carriers transited the Strait this week while signaling Indian ownership via transponder (rather than destination). India has been in direct talks with Tehran to secure cooking gas cargoes amid acute domestic LPG shortages and has purchased Iranian crude given the recent OFAC reprieve. India’s largest private refiner, Reliance Industries, purchased approximately five million barrels of Iranian crude, its first such purchase since 2019.
Also making it through the Strait was the supertanker Omega Trader, managed by Japan’s Mitsui OSK Lines, hauling two million barrels of Iraqi crude to Mumbai. This is the first observed movement of Baghdad’s oil since commercial shipping all but ceased and follows direct talks between Iraq and Iran. In each case, access came only after direct negotiations with Tehran.
Iran’s tolls in exchange for safe passage all it to monetize its control of the Strait. Secretary Rubio warned the G7 this could become a permanent post-war arrangement. If it does, Iran will have converted a military tactic into a structural economic lever over global energy flows-a precedent with consequences that extend well beyond the current conflict. Transit calls are down 94% since February 28 per Windward maritime data.
Oil Shock
The five-day diplomatic pause drove the sharpest single-session oil price drop of the war on Monday. Crude fell again midweek as diplomatic optimism rose and Iran announced non-hostile vessel passage. By Thursday, however, markets reversed as Iran’s formal rejection of the American peace plan and escalating hostilities erased the week’s gains. Brent closed on Friday at $112.57 (WTI at $99.64).
Thus, the case for seizing Kharg Island is gaining momentum. Interestingly, President Trump’s focus on the strategic importance of Kharg long predates the war. In fact, Trump told a media publication in 1988 that, if up to him, he would “go in and take” the island. Kharg accounts for 90% of Iran’s crude exports, benefiting from proximity to onshore oilfields, deep-water berths, storage capacity, and rapid loading. Last Sunday, a satellite image from the EU’s Copernicus Sentinel-2 platform showed three tankers actively loading at Kharg, proving that Iran’s oil infrastructure remains operational despite the war.
Prior to the war, Iran had reached a 46-year high in oil production despite international sanctions, with total liquids output around five million barrels a day. Iranian crude exports rose in February to an eight-year high of 2.2 million barrels a day. Since the war began, output has decreased, but Iran is still exporting at least 1.5 million barrels a day.
Seizing Kharg would give the U.S. direct leverage over Iran’s revenue. But destroying the facilities therein would take roughly 4.5 million barrels offline per day from a global market already facing an 8 million barrel per day shortage.
On the policy response side, the IEA’s 400 million barrel reserve release continues, with the U.S. contributing by far the most with 172 million barrels and Japan coming in second with nearly 80 million. Treasury’s OFAC temporary general license authorizing Iranian crude loaded as of March 20 adds marginal supply and is valid through April 19. The EPA is also expected to issue emergency waivers exempting E15 gasoline from volatility restrictions for the summer driving season, expanding availability in smog-affected areas.
According to the Wall Street Journal, the downstream effects of the oil shock are producing visible disruptions, particularly in Asia. Among the response initiatives taken in the region: China banned fuel exports for March; South Korea instituted driving restrictions; the Philippines authorized the use of dirtier fuels; Laos cut school days; Bangladesh and Pakistan closed universities or moved classes online. Energy executives have identified Europe and the U.S. West Coast as the next regions to be hit. California imports roughly 75% of its oil, 20% of its jet fuel, and 10% of its gasoline from Asia and the Middle East.
The downstream effects will also make their way to the agricultural supply chain in the coming months. Bloomberg reports that wheat farmers in Australia are paring back plantings due to fertilizer shortages and rising diesel costs. Australia’s wheat exports flow primarily to Asia and the Middle East. Near-term disruption is unlikely given global wheat overcapacity, but farmers are deciding on winter crop plantings now, meaning production shortfall is a long-tail consequence and would not materialize until 2027.
Economic Outlook
The week opened with the market reassured by President Trump’s energy infrastructure strike extension. Despite the President’s additional extension to delay the strike later in the week, the market reversed sharply on Thursday as Iran rejected the U.S. peace plan. U.S. equities closed Friday recording a fifth consecutive week of losses, the longest streak since 2022. The 30-year fixed mortgage rate climbed to 6.38% – its fourth consecutive weekly increase and highest since September, per Freddie Mac.
On the survey front, the University of Michigan’s final March consumer reading came in at 53.3, well below February’s 56.6. About two-thirds of interviews were conducted after the February 28 strikes, making this the cleanest post-war sentiment read to date. The short-run economic outlook dropped 14% and year-ahead expected personal finances decreased 10%. Year-ahead inflation expectations rose to 3.8%, the largest increase since April of 2025. Long-run expectations, however, declined only modestly.
The flash Composite PMI for March released last Tuesday told the same story in the business sector, falling to 51.4 (11-month low). Manufacturing, however, rose to 52.4 as tariff concerns are fading relative to war uncertainty. Input prices paid by businesses jumped to 63.2 from 60.0. S&P Global’s chief economist remarked that “PMI data are indicative of GDP rising at an annualized rate of just 1.0%… price gauges point to inflation accelerating back toward 4%, hinting at a growing risk of stagflation.”
The BLS’s February import and export price indexes, released Wednesday, provided the last pre-war baseline reading. Import prices rose 1.3% in February, the largest monthly increase since April 2024, and export prices advanced 1.5%. The March release, due April 15, will be the first to capture the war’s direct impact on import prices.
Continuing unemployment claims fell to 1.8 million for the week, the lowest level in nearly two years. The labor market continues to absorb the war’s shock, providing at least one positive economic indicator.
BlackRock President Rob Kapito warned that investors may still be underestimating war risks. Kapito forecasts a cut to growth by as much as two percentage points. For its part, the OECD maintained the global growth forecast at 2.9% for 2026 but cut its European outlook. The EU’s Economy Commissioner warned a prolonged conflict could push Europe into stagflation and Finland’s president warned of a global recession worse than the pandemic.
The stagflation framing is the Fed’s worst-case scenario. PPI came in at 3.4% on a 12-month basis last week and traders have shifted from pricing rate cuts to pricing rate hikes. Polymarket assigns a 31% probability to zero rate cuts in 2026, with 58% of the distribution concentrated at zero to one cuts. Fed governors with public speaking events this past week (Barr, Cook, and Jefferson) all reflected the committee’s genuine uncertainty. The Fed’s next meeting is scheduled for May 6-7.
TRADE UPDATE
China
The Trump-Xi summit in Beijing has a confirmed date: May 14-15. President Xi Jinping will make a reciprocal visit to Washington at a date to be announced. The war in Iran is expected to be a central topic.
Interestingly, China’s posture towards the war is seemingly in conflict. On one hand, the near closure of the Strait of Hormuz has a material impact on China’s energy security and export-driven economy. Signaling the concern, China’s top diplomat, Wang Yi, held a call last Tuesday with Iran’s Araghchi, urging him to “seize every opportunity for peace and start talks as soon as possible.”
Yet on the other hand, evidence is mounting of military intelligence-sharing between the People’s Liberation Army (PLA) and the IRGC. Specifically, the Wall Street Journal reported this week that the PLA has been supplying Iran with radar systems, navigation technology, and satellite intelligence, including the targeting data that enabled the Diego Garcia IRBM strike.
Thus, the timing of the Trump/Xi summit creates a de facto deadline: either the Iran war is resolved by mid-May or Trump arrives in Beijing with a live military conflict complicating an already fraught bilateral relationship.
U.S. negotiating goals for the summit are fairly transactional-they include increased Chinese purchases of soybeans, oil, gas, and Boeing aircraft, along with eased CCP export controls on rare-earth minerals. USTR Ambassador Jamieson Greer also began promoting the creation of a “Board of Trade” and a “Board of Investment” at the recent Paris preparatory talks. China, on the other hand, aims for a much more consequential concession: U.S. policy realignment on the status of Taiwan.
According to the Wall Street Journal, President Xi sees an opening with President Trump on the Taiwan question. During his first term, Trump reportedly offered to help Xi negotiate the status of Taiwan, according to former U.S. officials cited by the Journal. Xi is expected to test his theory and seek a shift from “opposing/not supporting” Taiwan independence towards eventually adopting Beijing’s preferred language of “peaceful reunification.”
Following Japanese Prime Minister Sanae Takaichi’s recent visit with President Trump, however, the White House issued a fact sheet stating that both leaders “opposed any attempts to unilaterally change the status quo, including by force or coercion.” This signals that Xi may be misreading the situation, with the resolve of the U.S.-Japan military alliance hardening on the issue of Taiwan, due-at least in part-to the ascension of the hawkish Takaichi.
Though olive branches have been extended by both sides ahead of the summit (CCP crackdown of fentanyl precursors and U.S. delay of Taiwan arms sales), friction points remain. PLA intelligence is an obvious aggravation to the U.S. side. And news of the Department of Justice (DOJ) filing charges against three individuals for smuggling advanced AI chips to China via Thailand and Malaysia highlights each side’s protective measures.
Case in point, the House Foreign Affairs Committee jumped on the DOJ news, passing the bipartisan Chip Security Act this week to curb smuggling of U.S. semiconductors to foreign adversaries. Congressional pushback against the Administration’s decision to allow Chinese access to Nvidia’s H200 also continues. Senators Jim Banks (R-IN) and Elizabeth Warren (D-MA) wrote Commerce Secretary Howard Lutnick this week urging reconsideration of Nvidia’s H200 export licenses.
Meanwhile, the CCP launched two investigations of its own targeting U.S. advanced technology export controls and U.S. barriers to Chinese green energy exports. A spokesman for China’s Ministry of Commerce (MOFCOM) framed the investigations as a response to the Administration’s new Section 301 investigations, stating that China would take “all necessary measures to resolutely safeguard our legitimate rights and interests.”
Tariffs
White House trade adviser Peter Navarro confirmed Wednesday at a Politico event that the President still intends to raise the current global Section 122 tariff rate from 10% to 15%, as previously stated (but not yet enacted) on Truth Social. According to Navarro, “It has happened, at least it’s in process to happen.”
Navarro also confirmed the Administration is planning to use new Section 232 investigations as an additive measure to the already-announced Section 301 investigations in order to reconstruct the country-specific IEEPA tariffs that have been struck down. That Navarro is reaffirming the 15% commitment publicly during a week of war-driven conjecture around stagflation is notable-it demonstrates that the Administration is showing no signs of treating energy inflation or the looming midterms as an inflection point to pause its overall tariff program.
USMCA
Mexican Economy Secretary Marcelo Ebrard said this week that he was encouraged by the pace of USMCA review talks. News indicated that the U.S. and Mexico are standing up a joint intellectual property enforcement effort. Meanwhile, a USMCA Rapid Response Labor Mechanism panel found “severe” denial of rights at a mining facility in Mexico, providing fodder to the Administration’s “forced labor” Section 301 investigation.
Likely echoing concerns being raised by Ambassador Greer, Representative Ron Estes (R-KS) announced via staff that he had met with the Mexican Embassy this week, focusing on Mexico’s treatment of U.S. corn and Tax Administration Services targeting of U.S. companies. Look for lawmakers to continue to press their personal district/state equities in the review talks.
On the northern side of the border, a long-simmering secession drive in Canada’s oil-rich western province of Alberta is poised to reach the ballot in October, with a petition requiring approximately 177,000 signatures due May 2. If successful, Premier Danielle Smith would set a referendum date asking residents whether Alberta should remain in Canada.
An independent Alberta, consisting of 5 million citizens and controlling one of the world’s largest crude reserves, would not automatically be covered by USMCA. Such a situation, while still unlikely, would create immediate renegotiation uncertainty across energy, agriculture, and manufacturing supply chains as the July 1 USMCA Joint Review deadline looms.
World Trade Organization
Ambassador Greer laid out U.S. concerns with the WTO’s governance structure at the 14th Ministerial Conference in Yaoundé this week, saying “U.S. trade policy measures are a corrective response to a trading system, embodied by the WTO, that has overseen and contributed to severe and sustained imbalances.” Greer directed his fellow ministers to focus “on reforms that would make the WTO more responsive to Members” and make the WTO an effective body once more.
Notably, Taiwan was blocked from attending the MC14, drawing immediate bipartisan condemnation in Washington. China Select Committee Chairman John Moolenaar (R-MI) and Ranking Member Ro Khanna (D-CA) issued a joint statement calling the decision “another troubling example of China’s continued efforts to manipulate multilateral institutions.” The two noted that Taiwan’s absence marks the first such exclusion since its accession in 2002.
Finally, Ambassador Greer met with EU Trade Commissioner Maros Sevcovic during the conference. This follows the European Parliament’s successful approval of the U.S.-EU Agreement on Reciprocal Trade (ART). Further negotiations between the two trading partners could begin as soon as April 13.
Miscellaneous
- Argentina. CBP announced an additional 80,000 metric tons of Argentinian beef could be entered as part of the quota agreement.
- Japan. The Commerce Department publicized three projects funded as part of the U.S.-Japan ART.
- PCAST. President Trump named 13 executives to the reconstituted President’s Council of Advisors on Science and Technology, including Mark Zuckerberg, Larry Ellison, Jensen Huang, and Marc Andreessen. The panel will be co-chaired by White House AI czar David Sacks and OSTP director Michael Kratsios and wield influence over AI policies, including the American AI Exports Program (launching April 1).
- South Korea. The National Assembly passed a long-delayed bill to create a $350 billion investment fund for advanced technology sectors in the U.S. as part of its ART commitment.
OUTLOOK/ANALYSIS
Operation Epic Fury enters its fifth week with two dominant variables fighting for supremacy-diplomacy and military escalation. President Trump’s April 6 deadline to Iran could very well be the deciding inflection point as to which variable wins out. The central question is whether either side’s actual negotiating position is reflected in its public statements.
The Arab alliance pressure on President Trump to finish the war, as well as Israel’s military determination, are both significant constraints towards achieving a diplomatic resolution. The Houthi’s entry into hostilities this week and Iranian attacks on Diego Garcia and Prince Sultan Air Base are datapoints that MBS, the UAE, and Prime Minister Benjamin Netanyahu are all likely to point to in order to influence President Trump’s resolve. Any ceasefire that leaves the Islamic Republic intact, Iranian proxies still capable, and the Strait under Iranian management will prompt sustained Arab/Israeli pushback on a U.S. exit.
Regardless of a diplomatic solution, the risk to the Middle East’s Red Sea shipping lifeline by the Houthis and the prospect of a sustained Iranian tolling system governing Hormuz, are both harbingers of a longer-term inflationary energy cycle. By week’s end, markets appeared to be pricing in these new variables, though there is still more headroom to go.
This longer-range shock is showing its first signs in key economic data-PMI, PPI, UM sentiment, import prices, equity markets, and the mortgage rate are all flashing red. The labor market, for now, is the last remaining positive. If jobless claims begin to turn with April’s reads, the Fed’s policy decision matrix will significantly narrow when it meets in May.
The Trump-Xi summit concentrates the above competing threads. If the Iran war is not resolved by then, Trump arrives in Beijing negotiating with the country that provided Iran with the intelligence to strike Diego Garcia. How Trump faces that reality while simultaneously managing a precarious trade truce, continued rare-earth access, and Taiwan security is a daunting question.
As of today, the weight of evidence-Iran’s rejection of the U.S. peace plan, activation of its Houthi proxy, the growing assembly of a U.S. ground force, and Secretary Rubio’s extended timeline-all tilt our assessment towards military escalation and both short- and long-term inflationary pressure.
The latter will have direct impact on a U.S. Congress that is increasingly locked in protracted partisan stalemates (e.g., Department of Homeland Security shutdown (DHS), SAVE America Act), primaries that eschew to each party’s base, and a consequential midterm general election that turns on “affordability” issues. If Congress does act on a second budget reconciliation package this spring, it may not only be with war-funding and DHS spending in mind. Congressional Republicans may also attempt to address affordability concerns exacerbated by the war-expanding the scope of the package and complicating the vote-counting math. President Trump’s April 6 deadline to the Iranian regime, now eight days away, could very well answer these questions.
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