To the Moon?
Global equity markets rebounded last week, supported by increased optimism around a potential off-ramp to the Iran conflict, and were led by developed international stocks. The Bloomberg US Aggregate Bond Index posted a positive return as 10-year U.S. Treasury (UST) yields had their first weekly decline since the conflict began on February 28. Energy prices remained elevated amid ongoing geopolitical uncertainty as West Texas Intermediate (WTI) crude oil hit its highest price since June 2022. However, strong payroll, manufacturing and retail sales data released last week was a reminder of a robust U.S. economy.
Market Outlook
Looking ahead, market-based inflation expectations suggest a stable monetary policy environment, with solid labor market data giving the Federal Reserve flexibility to maintain its current rate stance. With Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) Price Index data due this week, we expect headline inflation to reflect higher energy prices in the near term. As first-quarter earnings season approaches, consensus expectations have held up, although companies may begin to reflect a more cautious tone in guidance should geopolitical developments persist. While uncertainty will remain high during the conflict, underlying fundamentals have remained intact despite the market pullback.
Chart of the Week
Since the conflict in the Middle East began, the U.S. 10-year UST yield and WTI crude oil prices have risen in tandem.
Their moves higher signal rising inflation expectations from higher energy prices, rather than concerns about an economic slowdown.
While the macro backdrop has numerous uncertainties, fundamentals remain robust and support our view that investors should stay fully invested.
