Crosscurrents of Conflict: Oil Above $90 and the Market Repricing Underway
The ongoing conflict with Iran has introduced a significant new layer of uncertainty into global markets, with the most pronounced effects seen in the energy complex. Brent crude surpassed $90 per barrel on Friday, reflecting both escalating geopolitical tensions and the severe disruption of shipping traffic through the Strait of Hormuz, a critical chokepoint for global oil flows. The immediate halt in vessel movement has amplified the upward pressure on crude prices, and while a quick resolution remains the market’s preferred outcome, such optimism appears misplaced. The conflict is likely to persist well beyond initial expectations, raising the probability that oil prices push through the $100 per barrel threshold if hostilities continue.
Extended periods of elevated energy prices carry broader macroeconomic implications. Historically, energy shocks have tended to be short-lived and have had limited impact on long-term inflation trends. However, recent market behavior suggests growing concern that this episode may prove more persistent. U.S. Treasury yields offer a clear signal: after briefly dipping below 4% prior to the conflict, 10-year Treasury yields rebounded sharply to approximately 4.14%, indicating heightened inflation anxiety and a reassessment of economic risk.
Equity markets responded in kind. The S&P 500 declined to its lowest level since mid-December, reflecting mounting worries that higher energy prices and tightening financial conditions could slow economic momentum. Notably, traditional diversification provided little relief, as both equities and bonds posted losses last week—a reminder that during periods of acute macro stress, cross‑asset correlations can converge in unfavorable ways.
The week also brought a material downside surprise in the labor market. Nonfarm Payrolls fell by 92,000, well below the consensus expectation for a gain of 55,000, while the unemployment rate ticked up to 4.4%. This deterioration disrupts the recent narrative of labor‑market stabilization and, if paired with a sustained rise in energy-driven inflation, raises the specter of stagflation-like conditions. A cooling labor market alongside elevated or rising prices keeps the Federal Reserve firmly stuck between a rock and a hard place regarding its interest rate policy. Higher inflation would argue for maintaining a restrictive stance, yet weakening employment and potential spillover effects into consumption and corporate earnings would suggest the need for accommodation.
Ultimately, markets are likely to remain volatile until greater clarity emerges regarding the trajectory of the conflict and its impact on supply chains, energy markets, and economic sentiment. While near-term conditions are challenging, periods of dislocation often give way to compelling entry points once visibility improves. For now, however, prudence and patience remain essential as investors navigate a rapidly shifting macro landscape.
From the Municipal Desk (with contribution from Ryan Riffe):
In sympathy with the rates market, municipals experienced its worst week of the year as conflict in the Middle East intensified – which naturally fueled a volatile week across all markets. With oil prices spiking, fears of inflation spread quickly through the bond markets on Monday morning. By Tuesday's close, benchmark yields on the AAA MMD scale rose by as much as 15 basis points. Liquidations were clearly focused around 1-to-15-year maturities, where ratios have been the richest. Although Treasury rates continued to grind higher into Wednesday and Thursday, municipals found their footing and stabilized. A manageable new issue calendar, combined with another strong week of inflows, has provided the market with a much-welcome backstop. The calendar looks to increase next week from $11 billion to $13.1 billion with continued expectations of higher volatility. While buyers appear ready to step in on any weakness, the larger concern is that fund flows may slow or even turn negative, especially as reinvestment capital continues to decline.
Weekly Supply @ $13.1 Billion
2-YR Ratio @ 59%
3-YR Ratio @ 60%
5-YR Ratio @ 60%
10-YR Ratio @ 65%
30-YR Ratio @ 90%
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