To Summarize: Markets have pivoted quickly. Strait of Hormuz-driven oil closure and attacks on Middle East energy infrastructure revived inflation fears, hitting the stock and bond markets the hardest. Investors have flipped their Federal Reserve (Fed) interest rate narrative from cuts to possible hikes. Concurrently, inflation expectations are rising as higher energy costs feed into goods prices. Yet growth, capex, and consumer spending remain resilient—just more cautious under higher gas prices.
The big takeaway – Markets are repricing energy-driven inflation risk, even while the underlying economy keeps grinding forward.
In the Markets: After the closure of Strait of Hormuz lifted oil prices, March markets pulled back, reigniting inflation fears and tightening financial conditions. Most equity markets are now down year-to-date, driven by energy risk rather than weaker earnings. Bonds have sold off, especially in inflation-sensitive segments. The energy sector is directly benefitting from the higher prices, while healthcare, staples, and real estate are down for the month. Investors have shifted from expecting multiple rate cuts to considering potential hikes.
Inflation Heats Up & the Fed Hits Pause: Market-based inflation expectations are rising, and inflation-indexed bonds now point to more pressure over the next two years. At the same time, real-time data shows the economy is still growing. It’s this combination that explains the Fed’s caution. Goods prices are picking up as higher energy costs continue to flow through supply chains. With price pressures proving persistent, near-term rate cuts are looking less likely.
Caution Tape Goes Up in Credit Markets: The credit markets are growing more defensive as credit default swap costs rise and investors buy protection against stagflation. While the credit market is flashing yellow, the real economy still looks steady with weekly data pointing to ongoing growth, businesses are increasing capital spending to boost productivity, and consumers are still spending. Despite higher gas prices reshuffling budgets to more essentials and less travel, demand has not fallen off a cliff (yet).
Top Headlines: We’re reading about FedEx delivering an AI literacy initiative to over 400,000 employees, the non-oil impact Strait of Hormuz has on 100 million people, apartment and rent occupancy post back-to-back monthly increases for the first time in two years, and sellers are betting on a better homebuying market this spring.
Related resources:
- AI: FedEx has started delivering ‘promotion-ready’ AI training to over 400,000 workers
- Energy: The Strait of Hormuz is about more than just oil. It feeds 100 million people
- Commercial Real Estate: S. Apartment Occupancy and Rents Inch Up Again in February
- Residential Real Estate: More Sellers Test the Market, Hoping For a Spring Surge in Homebuyers
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