Strait of Hormuz: Risk Markets Veer Off the Straight and Narrow 

U.S. equity indexes finished lower in a volatile week shaped by geopolitical tensions and resulting volatility in oil prices, persistent inflation concerns, and a somewhat hawkish interpretation of the Federal Reserve’s latest policy signals. The Dow Jones Industrial Average fared worst, declining 2.11%, followed by the Nasdaq Composite, which shed 2.07%. The S&P MidCap 400 Index held up best but still fell 1.34%. 

Within the S&P 500 Index, energy was the best-performing sector by a wide margin as oil prices moved higher amid ongoing uncertainty surrounding Middle East supply risks. U.S. Treasury yields also mostly moved higher amid the heightened uncertainty, with the yield on the benchmark 10-year U.S. Treasury note rising to around 4.38% as of Friday afternoon. 

The pan-European STOXX Europe 600 Index declined by 3.79% in local currency terms. Investors’ focus was largely on the intensification of the conflict in the Middle East amid attacks on oil tankers in the strategic Strait of Hormuz and damage to natural gas terminals in Qatar. The ECB raised its inflation forecast for 2026 to 2.6%, up from 1.9% in December.  

China’s property sector showed signs of stabilization in February. New home prices across 70 cities declined 0.28%, moderating from a 0.37% drop in January. On a yearly basis, prices were down 3.2%, slightly worse than January. Authorities have introduced incremental support measures, including easing homebuying restrictions for nonresidents in major cities such as Shanghai and Beijing.  

Last week’s economic calendar also included several reports on the housing market, starting with the National Association of Home Builders’ (NAHB) Housing Market Index. On Monday, the NAHB reported that the index—which gauges overall builder sentiment toward housing market conditions—rose one point to 38 in March, with modest increases seen in all three of the index’s components. However, 37% of builders reported cutting prices during the month, and the NAHB noted that affordability remains a top concern. 

Key Takeaways 

1. The Middle East Conflict Escalates Into Energy Infrastructure 

Israel struck Iran’s South Pars gas field, the world’s largest natural gas reserve, and Iran responded by targeting energy infrastructure across the Middle East, disrupting oil and gas production. The conflict has moved beyond shipping-lane disruptions to direct damage to production infrastructure, which can take months or years to repair, not weeks. Implication – A ceasefire won’t necessarily restore energy supply quickly. Damaged facilities will have to be repaired and rebuilt, which means energy prices could have a structural floor that keeps oil and gas prices higher even if the conflict ends. 

2. Producer Prices Were Rising Before the Conflict 

The Producer Price Index rose 0.7% m/m in February, the hottest monthly PPI reading since July 2025 and the third consecutive month of acceleration. Headline PPI accelerated to 3.4% y/y from 2.9% in January, and core PPI rose to 3.9% from 3.5%. The data preceded the conflict and sharp rise in oil prices, suggesting inflation pressure was building before the oil spike. The composition also mattered: services drove the increase, pointing to broader pricing pressures than just oil. Implication – Services-driven inflation is harder to dismiss as transitory and suggests the Fed faces a potential dual battle: goods inflation from energy and services inflation from structural factors. 

3. Fed Holds Rates Steady & Rate Cut Expectations Pushed Into 2027 

The Fed held rates steady at 3.50–3.75% this week and raised its 2026 inflation forecast to 2.7%, up from 2.4% in December. Chair Powell acknowledged that a rate hike was discussed at the meeting, though he added that a hike isn’t the base case. While the Fed still projects one cut this year, futures markets moved past the Fed’s forecast. The market expects no rate cuts this year, with the next cut not forecast until July 2027. Implication – The shift from “when will the Fed cut” to “will the Fed cut at all” is a significant change. Earlier this year, the market expected two rate cuts in 2026, but the narrative is moving toward interest rates remaining higher for longer. 

4. The Stock Market Remains Choppy 

The S&P 500 rallied over +1.0% early in the week before giving it back as tensions escalated, oil prices rose, and rate cut expectations were delayed. The S&P 500 is now roughly -5% below its all-time high in late January and down about -3.5% for the year. However, the indicators associated with more serious market stress aren’t yet flashing. The VIX declined during the week and sits near 25, which is elevated but below panic levels. Credit spreads also tightened this week, a countertrend relief rally suggesting the credit market is not pricing imminent stress. Implication – The pattern of rallying on de-escalation hopes and selling on reality has held for multiple weeks; a durable break in either direction would change the picture, but the current setup remains heightened uncertainty rather than crisis. 

5. AI Demand Signals Remain Strong 

Nvidia’s developer conference reinforced strong demand for AI, with the company expecting ~$1 trillion in chip orders through 2027, double last October’s figure. Separately, Micron reported quarterly revenue of $23.9 billion, nearly triple last year. Implication – While markets have been volatile, the commentary suggests AI infrastructure spending remains strong. The market will be watching to see if the conflict impacts spending plans, such as tighter financing conditions or smaller budgets tied to economic uncertainty.