Oil prices surged 29% last weekend, topping $100/barrel for the first time since July 2022. Equity markets experienced declines all week, with losses deepening at first. The downturn eased somewhat after G7 ministers responded to several Middle Eastern countries’ plans to reduce production – prompted by Iran closing the Strait of Hormuz – by releasing about 400 million barrels from strategic reserves. David Kruk, head of trading at La Financiere del'Echiiquier in Paris commented, "The selloff is all about oil; it's about the inflation that is deduced from it; it's about the risk of stagflation. The market is anticipating the worst-case scenario.” Iran's new supreme leader, Mojtaba Khameini, son of the late Ayatollah Khameini, signaled they would not back down. President Trump said higher oil prices were a "small price to pay" for safety. The International Energy Agency warned the conflict will slash the global oil supply this month by 8 million barrels per day as the U.S. reported it plans to begin tanker escorts by the end of the month. 

The war in Iran remains only part of the global market story. A.I. is causing market disruptions with its capacity to create or destroy wealth for shareholders and creditors. Cracks are beginning to appear in multiple corners of private credit markets and the U.S. labor market is softening after last week's lackluster nonfarm payrolls report. Individually, the shocks are manageable. Taken all at once with the additional potential impact of inflationary price pressures may prove to be too much. That being said, doomsayers have predicted multiple downturns since the end of the Pandemic. They seem to expect each circumstance to pass with limited incident. Either way, it won't make the FOMC's rate decision any easier next week. At this point, concerns about the potential inflationary impact of a protracted conflict with Iran have pushed probabilities for the next full 25 bp cut out to March of 2027, with no change expected at next week’s meeting.

Mortgage rates continue to rise in sync with oil prices and Treasury yields after the average rate on a 30-year fixed rate mortgage briefly dropped below 6% at the end of February. At that time, the 10-year Treasury was at 3.96%. Since then, it has risen almost 30 bps to 4.23% as of this writing, pushing the average 30-year mortgage rate from 5.99% on February 27, to 6.19% on March 11. Relatively speaking, that's still better than the 6.63% average rate we saw 12 months ago, but it's still likely to weigh on an already beleaguered housing market.

At the same time, a report from VantageScore noted mortgage delinquencies increased across all credit tiers during January, with early-stage delinquencies rising by 30.9% YoY. Credit originations increased modestly over the same period as consumers grew leverage to navigate perceived economic stress. The exception was in credit cards where lenders are tightening standards. Susan Fahy, EVP and Chief Digital, Data and Technology Officer at VantageScore, commented, "The broad-based rise in early-stage credit delinquencies across VantageScore credit tiers underscores persistent macroeconomic pressures, particularly for more vulnerable borrowers. Sustained cost pressures and interest rates may leave some consumers increasingly exposed to future economic shocks."

KEY INDICATORS THIS WEEK

GDP - Revised down to 0.7% from 1.4% for Q4 due to downward revisions in consumer, business and government spending. 

CORE PCE - Rose 0.4% MoM and 3.1% YoY, highlighting a potential stagflation scenario if prices keep rising versus a weakening labor market.

Next week - Fed Week!