Capital Markets Update
 

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Week of 3/16/26 - 3/23/26

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Anyone interested in bonds or stocks digested fresh inflation data from the consumer price index report, ongoing volatility in energy markets remained present with Brent crude topping $100 amid given the U.S.–Iran war. Fed watchers took note that a federal judge blocked Justice Department subpoenas targeting Federal Reserve Chair Jerome Powell.
 

As the Iran war rages on, countries around the world are facing soaring energy prices that could dampen economic growth and boost inflation of necessities. The biggest threat is the closure of the Strait of Hormuz, a narrow waterway vital for the transit of roughly 20 percent of the world’s oil and liquid natural gas supply. Some nations are more insulated than others, but each one of them has responded to the crisis.
 

The heavy slate of economic data released over the past week painted a mixed picture of the U.S. economy heading into the war with Iran, suggesting momentum was already moderating before the escalation in the Middle East. January data showed consumers still spending, with personal income and spending each rising 0.4 percent, supported by strong wage growth and cost-of-living adjustments to Social Security benefits that lifted real disposable income at the fastest pace in roughly three years. Housing data released last week also reflected uncertainty: existing home sales rose modestly but remain constrained by mortgage rates above 6 percent and tight inventory, while builders appear cautious amid elevated unsold supply.
 

Broader metrics are less reassuring: the Federal Reserve’s preferred inflation gauge, the core PCE index, ticked up to 3.1 percent year-over-year, Q4 GDP growth was sharply revised down to 0.7 percent even as the GDP price deflator moved higher, and consumer sentiment slipped to a three-month low. Meanwhile, durable goods data suggested business investment remained resilient, and job openings unexpectedly climbed. The big takeaway is that the U.S is facing a labor market that is still firm even as growth slows, an uncomfortable combination that suggests stagflation risks have increased since the Federal Reserve’s last meeting in January.
 

Policymakers are now presented with the difficult challenge of balancing higher inflation alongside that softening labor market…an outcome that directly strains the Fed’s dual mandate of price stability and maximum employment. Regardless, the Federal Open Market Committee (FOMC) is expected to leave interest rates unchanged at the conclusion of its meeting this week, preserving flexibility in the face of significant uncertainty, particularly surrounding the volatility in oil prices. Inflation progress toward the Fed’s 2 percent target has stalled, and underlying price pressures remain sticky, especially within core PCE.
 

Investors are increasingly worried that rising oil and natural gas prices could erode household purchasing power, weigh on consumer sentiment, and reinforce inflation pressures. Your takeaway? Where markets once anticipated several rate cuts this year, attention has now turned to whether the Fed can deliver even one, as policymakers prepare to emphasize data dependence while assessing the inflationary impact of higher energy prices.
 

This week will be highlighted by the latest FOMC events on Tuesday and Wednesday, with the statement and SEP released on Wednesday followed by Chair Powell’s press conference. Before the Fed, the Royal Bank of Australia is expected to increase rates again by 25-basis points to 4.10 percent tomorrow, the Bank of Canada is expected to keep rates steady at 2.25 percent Wednesday morning, with the Bank of Japan, Bank of England, Swiss National Bank, and European Central Bank expected to hold rates steady on Thursday at 0.75 percent, 3.75 percent, 0 percent, and 2.00 percent, respectively.
 

Today’s economic calendar kicked off with Empire manufacturing for March, of secondary importance to Iranian war news. Later today brings industrial production and capacity utilization for February, the NAHB Housing Market Index for March, and some short-duration Treasury auctions. We begin the week with Agency MBS prices better than Friday’s close by .125-.250, the 2-year yielding 3.69, and the 10-year yielding 4.25 after closing last week at 4.29 percent (up 16-basis points over the course of the week).

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Commentary by Rob Chrisman