Baker Market Update 2026-05-22

It was another volatile week for markets, with the Iran energy shock continuing to reverberate across asset classes. Crude prices swung sharply throughout the week, opening Monday above $110 per barrel after fresh weekend attacks in the Gulf before briefly retreating to around $105 mid-week on news that supertankers carrying 6 million barrels had cleared the Strait of Hormuz. By Thursday, prices had spiked again after Tehran hardened its position on the nuclear program, reminding markets just how far apart the two sides remain. The International Energy Agency added to the concern this week, warning that if the Strait stays effectively closed, the world could be only months away from critically low crude inventory levels, a potential breaking point that would dwarf current price pressures.

Bond yields surged to kick off the week as well, driven by rising inflation expectations and growing bets on the potential for rate hikes. Compounding the volatility, the market is also reckoning with the idea that the Fed may not be stepping in as a buyer of last resort this time around. For years, investors have operated with an assumption that the Fed would step in to buy bonds and steady markets if needed. But that unspoken safety net may be gone given incoming Chair Kevin Warsh’s long held skepticism of the Fed playing market rescuer and inflation already a major concern. Without that cushion, a cornerstone of market confidence for over a decade, the bond market is repricing accordingly.

Wednesday's release of the April FOMC minutes, the last meeting chaired by Jerome Powell, showed just how much the Fed’s internal calculus has shifted over the past several months. A majority of policymakers felt that "some policy firming would likely become appropriate" should inflation remain persistently above the 2% target, with a vast majority flagging that the return to target could take significantly longer than previously anticipated. Crucially, more officials at April's meeting were open to rate hikes than at any prior gathering in recent memory, the second consecutive meeting to show that hawkish drift.

The convergence of an unresolved Gulf conflict, structurally higher energy prices, and a newly hawkish Fed creates a difficult backdrop heading into summer. With crude inventories potentially approaching a crunch point in the coming months and the new Fed leadership navigating both political expectations and economic reality, the weeks ahead could be even more turbulent. For now, markets are left pricing in a world where the old standards of cheap energy, accommodative policy, and central bank backstops may no longer apply.

With Memorial Day falling on Monday, markets will have an extra day to absorb it all and we’ll get an extra day of reprieve! Hope everyone is able to enjoy the long weekend. Happy Memorial Day!