White House is in a dilemma: between the pain of oil prices and military priority, how will Trump deal with the new round of inflation shock?

Before the conflict erupted in Iran, President Donald Trump of the United States - whether by proactive layout or accidental factors - seemed to have achieved his expected goals in three core financial markets: lower oil prices, lower treasury yields, and a weaker dollar. However, the weekend airstrikes by the United States and Israel and Iran's retaliatory actions are completely reversing the previous expected situation. As the Middle East conflict escalates, the soaring crude oil prices not only exacerbate inflation concerns but also create more uncertainty for the Federal Reserve to resume interest rate cuts. As a result, treasury yields have surged significantly, which goes against the government's previously stated goal of "reducing 10-year Treasury rates (as the benchmark rate for business and homebuyers loans)." At the same time, the dollar has regained its position as the leading safe-haven asset, showing a general strengthening trend against major currencies globally. If this trend continues, it may weaken the competitiveness of U.S. exports and disrupt Trump's agenda to revitalize manufacturing. Although the overall performance of the U.S. stock market this week has been stable, potential risks for the president include: if the war prolongs, energy prices will remain high, thereby weakening investment prospects and consumer confidence - at a time when the Democratic Party is focusing on issues of affordability, trying to regain control of Congress. "These unexpected consequences will hinder Trump's governance in the midterm elections," said Mina Krishnan, portfolio manager of Schroders Global Investments. "His 'barometer' is the S&P 500 index, gasoline prices, and mortgage rates. He considers these indicators as symbols of his success, which are now closely associated with potential failures." This is not the first time Trump has caused market volatility during his term, and the market's reaction this week has been more restrained compared to when he imposed high tariffs in April. However, the biggest difference now is that, given the war he has initiated, Wall Street has issued a warning - Trump may struggle to control the consequences. Scenario for 2022 This week, the Bloomberg Dollar Spot Index rose by more than 1%, and the 10-year Treasury yield climbed by about 20 basis points. However, these two indicators are still significantly lower than when Trump took office last year - mainly due to the impact of his policies and the resulting uncertainty on the labor market. In January of this year, Trump publicly acknowledged the recent depreciation of the U.S. dollar, further reinforcing the market's belief that the government intends to boost U.S. exports by weakening the dollar. Driven by these remarks, the dollar initially fell, but then gradually rebounded after Treasury Secretary Scott Bennett advocated a strong dollar policy, creating a dynamic game of "policy signals and market reactions." As the war continues, investors are starting to reiterate the "nightmare scenario" for 2022 - when after an escalation of the Russia-Ukraine conflict, oil prices soared to over $100 per barrel, intensifying inflation pressures, prompting the Federal Reserve to start an aggressive rate hike cycle, which then pushed up the dollar exchange rate and triggered a sharp decline in bond and stock markets. Currently, traders see such scenarios as tail risks rather than benchmark scenarios. On Wednesday, it was reported that Iran had indirectly sought negotiations with the U.S. (Tehran later denied this claim), causing the S&P 500 index to rise and the dollar to fall. On Thursday, as the war entered its sixth day, oil prices, yields, and the dollar once again rose, while stock markets fell in response. Scott Radner, Chief Investment Officer of Horizon Investments, pointed out that the current price movements "are consistent with the market's expectation of a relatively short conflict in Iran." When it comes to differences in market performance, the United States, as a net oil exporter, has significantly outperformed many regions in Europe and Asia that are heavily dependent on energy imports. An example is that this week, the excess return of the U.S. stock market relative to other global markets reached its highest level since April. The "sharp" rise in inflation However, the trend of oil prices soaring over 10% this week has brought domestic inflation pressures back into focus. Looking back to last month's State of the Union address, Trump had boasted about falling gasoline prices and claimed that inflation was experiencing a "sharp" decline - now with oil prices reversing course and rising, this narrative logic has been directly challenged. More critically, the surge in oil prices goes against his core goal of reducing government borrowing costs. Trump has been relentless in urging the Federal Reserve to cut interest rates, one of the deep reasons being to alleviate the burden of the approximately $1 trillion annual federal debt. However, since the outbreak of the war, traders' expectations of loose monetary policy by the Federal Reserve have undergone significant adjustments - they are no longer confident that the central bank will implement two 25-basis-point rate cuts this year, and just last Friday, the market widely expected three rate cuts before the year-end. "The war may completely undermine the market's dual expectations of 'cooling inflation and declining interest rates,'" said Ayako Yoshioka, Director and Senior Investment Strategist at Fortune Value Group. The bond market saw a drastic reversal this week, after performing strongly in February when tensions between the U.S. and Iran escalated, driven by investors' safe-haven demand, causing benchmark bond yields to touch multi-month lows in February. However, after the conflict erupted on Monday and oil prices rose, there was a fundamental reversal in market logic: the price of 10-year U.S. Treasury bonds saw its largest single-day decline since October - undoubtedly a negative signal for Bennett, who pays close attention to core bond market indicators. "Market trends reflect geopolitical realities," said Ed Adani, President of Adani Research. "And they are not always consistent with domestic policy goals." Trump: Iran military actions are more important than oil prices U.S. President Trump said on Thursday that he is not concerned about the rise in American gasoline prices due to the escalation of the conflict with Iran, emphasizing that military action is the current top priority. When asked about the rising prices at gas stations, Trump said, "I have no concern about that. Once this is all over, gas prices will quickly come back down. Even if they rise, let them rise, but that's much more important than a slight increase in gasoline prices." It is reported that Trump has proposed a timetable for military actions against Iran to last four to five weeks, but political and military experts doubt this, pointing out that the U.S. government has not yet clarified its ultimate strategic goals, while the conflict continues to spread in the region and beyond. The White House expects the conflict with Iran and the resulting "pangs at the pump" to be short-term. According to two anonymous insiders, White House energy advisers have reported to Trump's aides that the initial price impact on fuel markets is lower than most people expected and have urged patience. White House Press Secretary Karoline Leavitt said on Thursday that White House Chief of Staff Susie Wiles and Energy Secretary Chris Wright have both engaged with oil company CEOs to discuss possible measures to deal with rising energy prices. Three energy company executives told Reuters that the White House has very limited effective tools available to lower energy prices. One energy executive, speaking anonymously, admitted, "Looking at the policy options at home and abroad, while some measures may be effective, they are far from enough to reverse the situation. I think the core focus should be... doing everything possible to restore traffic through the Strait of Hormuz." A senior White House official said the U.S. Treasury Department is expected to announce measures to address rising energy prices as early as Thursday, including potential actions involving the oil futures market. This potential move would mark an unusual attempt by Washington to influence energy prices through financial markets rather than physical oil supplies. According to two sources familiar with the matter, officials are also discussing various options such as federal gasoline tax relief, easing summer gasoline environmental regulations to allow for a higher percentage of ethanol blends, and considering whether to release strategic oil reserves. However, Trump at least temporarily ruled out the option of releasing the strategic oil reserves during the interview. In the interview, Trump said he currently has no plans to tap into the strategic oil reserves - the world's largest emergency crude oil stocks - and is confident that the strategically vital Strait of Hormuz, as a key oil shipping channel, will remain open because the Iranian navy "has sunk to the bottom of the sea." Since the outbreak of hostilities last Saturday, as the conflict continues to disrupt oil supplies in the Middle East region, global oil prices have surged by 16%. According to data from the American Automobile Association tracking fuel prices, the average gasoline price in the U.S. has risen by 27 cents per gallon this week, reaching $3.25 per gallon, 15 cents higher than the same period last year. However, Trump said the rise in oil prices is "not significant."