Geopolitics remained the single biggest force shaping markets this week. The escalating conflict between the U.S. and Iran dominated trading across all asset classes and injected a level of uncertainty that overwhelmed the week’s economic data.
Oil markets remained at the center of the storm, with prices surging and retreating as optimism around a potential end to the conflict oscillated alongside political rhetoric. By week’s end, Brent crude (a global oil benchmark) had again breached $110 per barrel and domestic gasoline prices approached $4 per gallon. The continued volatility in energy prices has strengthened concerns that inflation could remain above target for longer than expected.
That shift in the inflation narrative was quickly reflected in fixed income markets. Treasury yields moved higher over the course of the week, driven by both inflation concerns and weakening demand at government debt auctions.
Not only are bonds failing to provide their traditional safe-haven role amid geopolitical unrest, but gold continued to sell off this week as well. In a typical risk-off environment, investors rotate out of riskier assets like equities and into “safe haven” assets such as bonds and gold, which are expected to hold value (or even rally) during periods of stress. However, that playbook has broken down, as inflation concerns push bond and gold prices lower rather than higher.
Adding to market jitters, Wednesday’s import price data showed a much larger-than-expected increase in February, even before the onset of the conflict. U.S. import prices rose by the most in four years, reflecting strong gains in food and consumer goods prices.
As of this morning, the benchmark 10-year U.S. Treasury yield has risen to its highest level in eight months. Futures markets are now pricing in no additional Fed rate cuts this year and are flirting with the idea of a rate hike by year-end.
Looking ahead, next week brings a full slate of labor market data, including job openings, ADP employment, initial jobless claims, and the March unemployment report.
Have a great weekend!
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Andrea F. Pringle
Senior Vice President
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