Trump considers declaring end to Iran conflict as Pentagon extends deployments

Key developments:

• According to a Wall Street Journal report, President Trump has been privately discussing with senior aides the possibility of declaring an end to the war with Iran, and he has expressed support for the idea, believing that continued economic pressure will ultimately compel Iran's regime to either give up its nuclear program or face collapse.
• Separately, Defense Secretary Pete Hegseth is extending the deployment of US troops across the Middle East through 2027, indicating that the Pentagon is preparing for the conflict to continue even as Trump considers a withdrawal.
• CNN reported that on Tuesday, the US military escorted 40 commercial vessels carrying approximately 18 million barrels of oil through the Strait of Hormuz, marking a wartime high near pre-war flow levels, while intercepting a cruise missile and repelling drone attacks.
• Iran launched missiles and drones at a US military base in Kuwait, with reports of thick smoke at the site as Kuwaiti air defenses reacted.
• Gold continued its recovery, rising above $4,420 an ounce, helped by a weaker dollar and yields retreating from recent highs.
• Reserve Bank of New Zealand Governor Anna Breman described Wednesday's rate increase to 2.75% as appropriate, anticipating a broadening of growth, while highlighting risks to inflation expectations and indirect effects from oil prices. Chief Economist Carl Conway pointed to significant regional differences and difficult conditions in Auckland.
• John Williams, President of the New York Federal Reserve, dampened hopes for a September rate hike, while Fed Governor Christopher Waller is scheduled to speak later in the US session.
• Japan's services purchasing managers' index climbed to 52.5 in August from 51.2, a five-month high. S&P Global noted that near-record output charge growth bolsters the argument for another rate hike by the Bank of Japan.
• China's private RatingDog services PMI increased to 51.4 from 50.4, moving contrary to the more subdued official survey released on Monday. The composite PMI rose to 52.1 from 50.8.
• Most Asia-Pacific stocks advanced on Thursday, following Wall Street's gains, as yields edged lower. Japan's Nikkei saw only slight gains due to a stronger yen, while South Korea's Kospi outperformed, rising approximately 1.5%.
• USD/JPY dropped below 158, its lowest level since August 10, as the yen strengthened broadly, pushing yen crosses lower, even as EUR/USD and GBP/USD climbed.

For markets on Thursday, the key story was a Wall Street Journal report indicating that President Trump is privately discussing an end to the war with Iran, while his own Pentagon quietly extends troop deployments through 2027. According to the report, Trump has informed senior aides that he favors declaring an end to the six-month conflict, believing that sustained economic pressure will eventually force Tehran to either abandon its nuclear program or collapse. This stated preference conflicts with Defense Secretary Pete Hegseth's strategy, which involves extending deployment timelines for warships, air defense units, and paratroopers, an open-ended approach aimed at preserving Trump's options rather than reducing the conflict.

The de-escalation story received backing from a separate CNN report stating that on Tuesday, the US military escorted 40 commercial vessels carrying about 18 million barrels of oil through the Strait of Hormuz, a wartime high nearing pre-war throughput levels. During the operation, US forces intercepted an anti-ship cruise missile and repelled several drone attacks. If correct, the size of the escorted flow suggests that supply worries are being handled effectively, and it may reduce the geopolitical risk premium in oil prices at the margin.

However, the situation on the ground is still far from resolved. Iran attacked a US military base in Kuwait with missiles and drones, and sources reported thick smoke rising from the site as Kuwaiti air defenses responded. President Trump also stated publicly that the renewed campaign against Iran would not continue much longer, comments that align with the private discussions reported by the Journal.

In other markets, gold extended its recovery from the previous session, climbing back above $4,420 an ounce, supported by a broadly weaker US dollar and Treasury yields pulling back from recent highs.

In central bank news, Reserve Bank of New Zealand Governor Anna Breman stated that a gradual withdrawal of monetary stimulus remains appropriate after Wednesday's rate increase to 2.75%, and she expects growth to broaden over the next year. She highlighted risks to inflation expectations and indirect effects from higher oil prices. Chief Economist Carl Conway separately noted significant regional disparities in the New Zealand economy, describing Auckland's conditions as tough. In the US on Wednesday, New York Fed President John Williams dampened expectations for a rate hike at this month's meeting, while Fed Governor Christopher Waller is scheduled to speak during the upcoming US session.

On the data front, Japan's services PMI increased to 52.5 in August from 51.2, a five-month high. Annabel Fiddes of S&P Global said that the near-record pace of output charge increases reinforces the case for another Bank of Japan rate hike. In China, the private RatingDog services PMI rose to 51.4 from 50.4, continuing a divergence from the weaker official survey on Monday, and the RatingDog composite PMI climbed to 52.1 from 50.8.

Asia-Pacific equities mostly posted gains on Thursday, following Wall Street's overnight advances, with yields declining across the region. Japan's Nikkei recorded only modest gains due to a stronger yen affecting exporters, while South Korea's Kospi outperformed its regional counterparts, rising about 1.5%.

In currency markets, USD/JPY fell below 158, the lowest since August 10, as broad yen strength pushed most yen crosses lower, even as EUR/USD and GBP/USD both rose. There has been increasing market discussion about the Bank of Japan's September 17-18 meeting, which is followed by market closures on September 21, 22, and 23, with some pointing to a risk of intervention occurring during those thinly traded holiday days. With the meeting still about two weeks away, that narrative appears somewhat exaggerated at this point. A more plausible reason for the current yen strength is straightforward hawkish repricing ahead of the meeting, following BOJ board member Hajime Takata's comments this week advocating a nimble rather than fixed pace approach to further rate increases.