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Summary:
- Oil surged to session highs after Iran launched missiles and drones against Kuwait and claimed responsibility for striking a US air base, effectively ending any pretence that the ceasefire remains functional
- The IRGC said the Kuwait attack was direct retaliation for the earlier US strike near Bandar Abbas Airport and warned any further US action would trigger a more decisive response
- US-Iran nuclear and Hormuz talks stalled, pushing Brent crude back higher after earlier peace hopes had briefly pulled prices lower this week
- The US sanctioned Iran’s Persian Gulf Strait Authority, the body administering Hormuz tolls, with Treasury Secretary Bessent saying maximum pressure on Tehran continues
- A chorus of central bankers gathered in Tokyo struck a consistently hawkish tone, with Fed officials Cook, Jefferson, Kashkari, and Goolsbee all flagging upside inflation risks and resistance to early easing
- ECB Chief Economist Lane warned second-round energy shock effects would persist well beyond any Iran war resolution
- The Bank of Korea held rates at 2.50% but two members dissented for an immediate hike and the dot plot showed the majority of projections pointing to 3.00% within six months
- RBNZ Governor Breman signalling hikes would come sooner and by more than previously expected
- New Zealand’s budget forecast a narrower 2025/26 deficit but cut its 2026/27 GDP growth forecast to 2.3% and projected inflation peaking at 4.0% in Q2 2026
- Australian Q1 capex surged 6.5%, driven by data centre equipment investment, though the gain is expected to be largely offset by higher capital goods imports in next week’s GDP figures; April household spending fell 1.1%, more than double expectations
- Regional equities fell; the US dollar rose; gold dropped more than $60
Oil dominated the session from start to finish, and the arc of the price action told the story of the day. Prices initially pushed higher after a US official confirmed that American forces had struck an Iranian military site near Bandar Abbas and intercepted four one-way attack drones that had been launched toward a US navy vessel and a commercial ship. A fifth drone launcher was hit on the ground before it could fire. Iran’s account contradicted the US version almost entirely, with Tehran claiming its navy had merely fired warning shots at a US tanker running without radar, and that the subsequent US strike caused neither casualties nor damage. The competing narratives unsettled markets without resolving anything.
A brief retreat in oil prices followed, but the pullback proved short-lived. The session’s most dramatic development arrived later when Iran launched ballistic missiles and drones against Kuwait. Locals reported air raid alerts, explosions, and at least one air defence engagement. The IRGC subsequently confirmed the attack, stating it had targeted a US air base in direct retaliation for the Bandar Abbas strike and warning that any further US military action would trigger a more decisive response. Washington, the IRGC said, bears full responsibility for the consequences.
The Kuwait attack, combined with the named retaliation framing and the explicit threat of escalation, renders the ceasefire framework effectively hollow. What has been a persistent low-level military exchange in and around the Strait of Hormuz has now extended geographically into Gulf state territory. Oil hit its session high on the news. The US dollar strengthened. Gold fell more than $60, reflecting a rotation toward the dollar as the safe-haven of choice in an environment where geopolitical risk is accelerating rather than abating.
On the financial pressure track, the United States sanctioned the Persian Gulf Strait Authority, Iran’s body for administering Hormuz passage requests and toll collection, with Treasury Secretary Bessent describing the action as targeting the toll regime directly and affirming that maximum pressure on Tehran remains the policy.
The central bank dimension of the session was almost as busy as the geopolitical one. A gathering of senior policymakers at a Bank of Japan conference in Tokyo produced a remarkably unified hawkish message. Fed Vice Chair Jefferson said policy is well positioned and that, given a resilient labour market, it is appropriate to keep the focus on returning inflation to 2%. He drew a precise line between first-round energy price effects, which monetary policy cannot prevent, and second-round expectation effects, which it must.
Earlier, Governor Cook said inflation is clearly moving in the wrong direction and that she is prepared to raise rates if disinflation does not materialise. Kashkari said inflation is still far too high and bringing it down remains his overriding priority. Goolsbee added a structural dimension, arguing that anticipated AI productivity gains are themselves inflationary and that the oil shock compounds rather than offsets that pressure, pushing back directly against the view that AI gives central banks room to ease.
ECB Chief Economist Lane warned that Iran conflict inflation could persist long after the fighting stops, citing second-round effects, supply chain repositioning, and non-linear price dynamics from the ECB’s own experience.
The Bank of Korea held its benchmark rate at 2.50% as expected but the decision carried unmistakable hawkish intent: two members dissented for an immediate hike, the inflation forecast was revised sharply higher to 2.7% for 2026, and 19 of 21 dot plot projections showed rates moving higher within six months, with the majority pointing to 3.00%. Kospi dropped 3%.
In New Zealand, RBNZ Governor Breman told lawmakers that hikes would arrive sooner and go further than previously expected as the bank wrestles with war-driven energy inflation. New Zealand’s budget, released on the same day, added context: Treasury projected inflation peaking at 4.0% in Q2 2026 and cut the 2026/27 GDP growth forecast to 2.3% from 3.4%.
In Australia, first-quarter private capital expenditure rose 6.5%, a strong headline driven almost entirely by data centre equipment investment. The ABS noted the lift explicitly, and analysts flagged that much of the national accounts impact would be faded by higher capital goods imports. The more domestically significant number was April household spending, which fell 1.1%, more than double the expected decline, with discretionary spending recording its steepest monthly drop since February 2024. Friday brings the Fed’s preferred inflation gauge, the PCE report, and markets will be watching closely for any sign that the disinflation the Fed is counting on is beginning to appear.