FOMC, March OPEX, Oil, & Iran

RECAPPING LAST WEEK

Escalations in the Middle East conflict raised fears regarding the largest potential oil supply
disruption in history. During the week, crude oil soared to $119.50, then plunged below $77 before
again ascending to nearly $99. It ended the week higher by 8% despite the International Energy
Agency’s largest-ever release of 400 million barrels to try to reign in prices. The nauseating
volatility left U.S. equity indices lower for the week; the S&P500 and Nasdaq Composite indices
fell around 1.5% while the Russell 2000 dropped nearly 2%. Although the major indices avoided
severe carnage, heightened volatility kept investors on edge. The VIX jumped above 35 before
settling near 27, which still implied a 1.7% daily move for the S&P500. Nine of 11 sectors lost
ground, with financials tumbling more than 3% on palpable private credit worries. JPMorgan
Chase reportedly marked down some loan values held as collateral, reducing the ability of private
credit firms to borrow against those loans. Gold and silver ended down 3% and 5%, respectively,
while Bitcoin rose 4%, decoupling somewhat from the weakness in equities. U.S. Treasury yields
surged as the risk of inflation from energy prices drove bond prices lower. Weak demand at
auctions of 3- and 10-year notes also weighed on sentiment, along with investors digesting a
record $66 billion in new corporate debt on Tuesday. In economic news, U.S. CPI rose 0.3% MoM
in February, slightly above the prior reading. The delayed core PCE price index from January
showed a 0.4% increase MoM and 3.1% YoY. Both reports suggested that prices were on the rise
even before the outbreak of war this month. The second estimate of Q4 2025 GDP was revised
lower to 0.7% growth from 1.4% on downgrades to exports and government spending. Final sales
to private domestic purchasers, a closely-watched measure of domestic demand, slipped to a
1.9% gain from the initial estimate of 2.4%. Consumer sentiment slid to 55.5 this month from
56.6, with about half of the survey responses collected after the start of the U.S.-Israeli war with
Iran. Inflation expectations for the next year were flat at 3.4%. Finally, housing starts and existing
home sales rose to start the year as affordability improved and multifamily construction boomed.
On the international side, major equity indices fell around 2%, pressured by a rising U.S. dollar
and sensitivity to higher energy prices. In China, consumer inflation jumped by the most in three
years while deflation in producer prices moderated. At an economic policy-setting meeting last
week, the country lowered its GDP growth target to a range of 4.5% to 5%, its lowest goal since
the early 1990s. China’s trade surplus rose to the highest level on record as exports surged 21.8%
YoY in the January-February period.

THE WEEK AHEAD

In his first comments on Thursday, Iran’s new supreme leader Mojtaba Khamenei vowed to keep
the Strait of Hormuz shut, leveraging the country’s strategic position in the Persian Gulf to hold
the global economy hostage. Although an Indian oil tanker on Friday was among limited ships that
have moved through the strait, and despite the IEA’s aforementioned release and the U.S.
allowing countries to buy Russian oil from ships stranded at sea for the next 30 days, experts fear
that only an end to the conflict would resolve the currently untenable situation. Any disruption in
oil flows lasting more than a few more weeks would likely necessitate more inventory releases,
and getting those barrels to market is a formidable challenge. In the midst of turmoil, investors will
have six central bank decisions to mull over this week. In the U.S., the Federal Reserve is likely to
hold rates steady as it faces prospects of higher inflation and a weaker labor market. The Fed will
also update the Summary of Economic Projections midweek. Plenty of fresh uncertainty has been
added to the outlook due to the Iran conflict. Fed funds futures aren’t indicating better than a 50%
chance of a rate cut until the October meeting. The economic calendar features housing data,
producer prices, and regional manufacturing surveys, while chip giant Micron Technology reports
earnings on Wednesday after market close. Central banks in Australia, Canada, and Japan have
rate decisions earlier in the week, followed by the UK and Europe on Thursday. While all are
expected to leave rates unchanged, their statements will be scrutinized for any hawkish shifts in
tone. Releases on the international economic calendar include China’s monthly data dump,
German economic sentiment, Canadian CPI, and UK employment figures.


(Schwab)