Newsletter

We began the month at war, amidst a profoundly changing geopolitical landscape. The entire Middle East has been swept into this fray, with Iran having launched attacks against most of its neighbors in the Persian Gulf, targeting civilians and energy infrastructure. The Straits of Hormuz are largely closed at the moment, and approximately 20% of the world’s oil passes through these important waters.

In this environment, economic reports are likely to recede into the background in terms of importance, for at least the next few weeks while the geopolitical reality is solidifying. The only real exception to this will be inflation data. 

 

Notably and predictably, the price of oil has risen sharply since February 27th, with West Texas Intermediate Crude Oil futures up ~12% since the close that day, as of this writing (3/4/26). Energy prices are volatile to begin with, and the crude contract was already up ~21% from recent lows in December as of the close on 27th of February. While the volatility of energy prices keeps them out of “core” inflation models, energy prices can have a large impact on the public’s perception of inflation and therefore expectations for future inflation. This is a key point, as should this conflict continue for any extended time, pain at the pump and in utility bills eventually, will cause long-term inflation expectations to rise, making what is an already problematic variable even more so.

Monetary policy already had higher than comfortable inflation to contend with as it has continued keeping the overnight rate artificially low, in effect providing stimulus to an already-strong economy. We believed this policy to have been wrong-footed prior to the beginning of hostilities in the Persian Gulf, and the current situation only exacerbates the degree of the perceived mismatch.

The yield curve has notably shifted higher since February 27th.  A shift is when the entire curve moves, and in this case, the shift represents an increase in inflation expectations. It is notable that bonds are not behaving as they traditionally have during global crises. The typical flight to quality trade sees equity indexes decline along with bonds rising, as investors seek the safety of US Treasuries. Instead, Treasuries are being sold. This pattern echoes the 1970’s, a similar period of turbulence in the Middle East accompanied by spikes in energy prices.

The equities market has held up rather well, as the S&P 500 remains within striking distance of its all-time highs set earlier this year. Ultimately, what happens from here depends on how the conflict evolves or concludes, and what we are seeing right now is evidence supporting the old adages “don’t fight a bull market,” and “the market climbs a wall of worry.”