The Iran Memorandum and Congressional Discontent
There is a notable tension in Washington at the moment. While there is genuine enthusiasm surrounding the memorandum of understanding tied to Iran, a great many details remain missing, and Congress has accumulated a long list of questions about it. Importantly, this skepticism is not confined to the opposition — even Republican lawmakers are not uniformly, 100% comfortable with everything in the arrangement.
The central question now is the next step. A 60-day window of negotiations lies ahead, focused specifically on Iran's nuclear development program. This is precisely the area where Congress is most engaged. Lawmakers want a direct role: if a deal ultimately emerges from those negotiations, Congress wants to vote on it and to exercise that kind of approval and involvement. Throughout the process so far, they have felt pushed to the side, and there is clear appetite to reassert their authority.
There is also a strong political dimension. Politically, there is an eagerness to put the Iran matter behind them and to pivot toward more domestic-focused concerns — particularly affordability issues. Heading into the election, Republicans find themselves in a difficult position, and they would much rather be talking about something other than Iran.
The Bank of Japan's Balancing Act
The Bank of Japan delivered a rate hike, as had been widely expected, with relatively few surprises in the messaging. With the usual governor hospitalized, the deputy filled in at the press conference and managed to strike an effective balance — neither too hot nor too cold, neither too dovish nor too hawkish. By that measure, the yen "doing not too much" in response can itself be read as a success.
A few specifics stood out. The Bank confirmed it would continue to taper its purchases of Japanese government bonds (JGBs) before resuming that buying in April. The combination of continuing to purchase bonds while simultaneously hiking interest rates represents something of a mixed signal. The Bank also dropped its long-standing reference to borrowing costs being "significantly low," a change that may indicate policy is approaching the lower end of its neutral rate range.
Despite the hike, the yen remained quite weak, hovering around the 160 level, while the Nikkei 225 reached a record high. This persistent weakness suggests the market may believe the Bank of Japan needs to be more aggressive in tightening policy. The key variable going forward is pace. If the Bank were to quicken its hikes to a cadence faster than once every six months, that could bolster the yen and would be read as a win for the currency. Underpinning this is an internal view at the Bank that the upside risk to inflation is a greater concern than the downside risk to the economy — a stance that argues for vigilance on tightening.
Kevin Warsh's First FOMC and a New Communication Philosophy
Attention has turned to Kevin Warsh as his first FOMC meeting wraps up, with markets focused on the signals he may send. The expectation is that the meeting itself will produce little drama. Having been on the job for only four weeks, Warsh is not anticipated to make many headline-grabbing comments.
The most interesting dimension is what he signals about communication itself. Warsh has been very clear in his belief that the Fed "overcommunicates" — that is his own word. Notably, he has not committed to holding a press conference after every FOMC meeting, a practice that Jerome Powell instituted back in 2019. How Warsh handles questions about this, and about how frequently he intends to speak to the press at all, will be telling.
A related theme is forward guidance. Warsh is not a fan of the Fed's forward guidance and dislikes the so-called "dot plot" — the chart in which committee members signal where they expect rates to head over the coming years — which was due to be revealed at this meeting. It is unlikely that he would make a dramatic pronouncement abolishing the dot plot outright. However, there may well be signals about how he intends to gradually move away from that style of communication. The question of whether the Fed ultimately drops the dot plot looms over the proceedings.
China's Weakness and the Redrawing of the Emerging-Markets Map
Fresh data out of China was poor, particularly on consumption, underscoring just how uneven the economy remains. Retail sales fell and consumer confidence stayed weak. This is a continuing story: China is over-reliant on exports while its domestic demand is soft. Although exports are benefiting from China's role in the AI supply chain, that AI strength is not translating into AI profits within China itself.
The contrast with other parts of Asia is stark. Earnings estimates in Korea and Taiwan have surged. That surge, however, is highly concentrated — driven almost entirely by three chip makers: one in Taiwan and two in South Korea.
This dynamic is reshaping the emerging-markets index. China's weight and importance in the EM index has been slipping dramatically. Comparing October 2020 with the present, China's weight in the index has been cut in half, while the weight of Korea and Taiwan has doubled. As a result, China is now only the third-largest country weight in the EM index, having previously been the largest.
There are also signs of speculative excess in the region. The world's largest single-stock leveraged ETF is now built on SK Hynix — a single company in Korea. The size of that fund is staggering: roughly $10 billion, which is double that of any other single-stock leveraged ETF. While expected earnings growth has been surging, expectations have become quite elevated, and that leaves these stocks vulnerable to disappointment if results fall short. How these index weights continue to shift over time will be worth watching.
A Tale of Diverging Markets
Chinese equities remain relatively cheap, yet the broader picture is one of divergence. A chart circulated this morning highlighted the gap between the US MSCI and China MSCI indices, which are clearly heading in opposite directions — a striking outcome given everything China has achieved over the past decade, particularly in technology. The juxtaposition is a fascinating illustration of how achievement and market performance do not always move together.
Questions Asked and Answered
How is the Iran memorandum going down in Washington in terms of legislative and congressional approval, given that GOP lawmakers still have many questions? There is enthusiasm about the memorandum of understanding, but many details are missing and Congress — including Republicans — has many questions. The next step is a 60-day negotiation over Iran's nuclear program, and Congress, feeling sidelined, wants to vote on any eventual deal. Politically, lawmakers are eager to move past Iran toward domestic affordability issues ahead of the election.
What to make of the Bank of Japan's hike and the market's reaction, with the yen near 160 and the Nikkei at a record? The stand-in presenter struck a well-balanced tone, and the muted yen reaction was a win. The simultaneous bond-buying and rate-hiking is a mixed signal, and dropping the "significantly low" reference suggests rates are nearing the neutral range. The weak yen implies the market wants more aggressive tightening; a faster-than-six-month hike pace would be bullish for the yen, and the Bank views inflation upside as a bigger risk than economic downside.
What signals will be most important to watch from Kevin Warsh at his first FOMC? Little drama is expected. The key focus is communication: Warsh believes the Fed overcommunicates, has not committed to a press conference after every meeting, and dislikes forward guidance and the dot plot. He is unlikely to abolish the dot plot immediately, but may signal a gradual move away from such communication.
How does weak Chinese consumption data affect markets and companies tied to the Chinese economy, especially e-commerce and consumer-facing names? It reflects an ongoing story of export over-reliance and weak domestic demand, with falling retail sales and weak confidence. AI strength is not translating into AI profits in China, while Korea and Taiwan earnings surge on a few chip makers. China's EM index weight has halved since October 2020 to third place, Korea and Taiwan have doubled, and speculative excess — like the $10 billion SK Hynix leveraged ETF — leaves elevated expectations vulnerable to disappointment.
