If you look at the financial markets, you can “read” what investors are thinking about the economic outlook – are the shocks positive or negative, and are they supply or demand shocks?

Over the past week three things have happened, all of which may have moved the markets:

1. A deal between the Trump administration and the regime in Iran to halt the fighting and gradually reopen the Strait of Hormuz.
2. The new Fed chairman, Kevin Warsh, has held his first FOMC meeting – and the signal was clear: “The Committee will deliver price stability” – the implication being that inflation is above the 2% target, and the Fed is going to do something about it.
3. SpaceX has been floated – the largest IPO in history. It went well for the first few days, but the past few days have not been pretty.

The first event is a positive supply shock – and oil prices therefore fall. That is good news for the world economy.

The second is, by contrast, a negative demand shock – the Fed is signalling clearly that rate rises have moved much closer. A negative demand impulse sends both growth and inflation down. Lower growth is not good for oil prices either, so down they go a little further.

And finally SpaceX – this is the story of an equity market that has become too expensive. It is neither a demand nor a supply shock, but it can develop into a negative demand shock if it leads to financial distress, in which investors increase their demand for “safe assets” – primarily dollars and government bonds.

If that happens, a larger equity-market correction should produce a stronger dollar and lower bond yields (and lower inflation expectations).

1. Lower equities (pointing to overvaluation of the equity market and/or a negative demand shock).
2. Lower inflation expectations and lower yields (a positive supply shock and/or a negative demand shock).
3. A stronger dollar (tighter monetary policy and/or rising risk aversion as a result of the repricing of the US equity market).
4. Lower oil prices (tighter monetary policy, lower growth and/or a positive supply shock).

Taken together, then, it looks as though this is mostly about Kevin Warsh – and, to some extent, Elon Musk’s space project.

Investors are reacting to the fact that Warsh was considerably more hawkish than expected. The Fed has a clear mandate to secure price stability, and it has not lived up to that mandate for more than five years. But Warsh and the rest of the FOMC now appear to be sending a clear signal that something will be done about it. Credibility is to be restored.

That also fits, incidentally, with what we are seeing in the yield curve – long yields, which measure growth and inflation expectations, are falling relative to short yields, which are governed more by expectations about monetary policy.

There is, by contrast, not much effect from Trump’s “peace deal” with the Iranians. If that had dominated, equities should have risen. That has most certainly not happened.