Updates

Markets Shrug Off Geopolitical and Policy Uncertainty..

• The U.S.–Iran ceasefire was extended yesterday, though signals from Iranian leadership remain mixed. Iran’s ambassador to the United Nations indicated a willingness to pursue a more durable agreement, suggesting continued openness to diplomacy. In contrast, the Islamic Revolutionary Guard Corps struck a more confrontational tone stating that the U.S. naval blockade “is no different than bombing” and must be met with a military response. The U.S. administration has maintained its position, indicating the blockade will remain in place for now. The divergence in rhetoric underscores the fragility of the arrangement and the risk that tensions could re-escalate with limited warning.

• Meanwhile, Federal Reserve Chair nominee Kevin Warsh appeared before the Senate Banking Committee for his confirmation hearing. Lawmakers questioned him on his policy framework, financial background, and, most notably, his ability to maintain independence from the Executive Branch. The nomination process remains stalled as members of the Committee continue to withhold advancement pending the resolution of ongoing investigations involving current Chair Jerome Powell. The delay extends uncertainty around the future direction of monetary policy leadership at a time when inflation remains above target.

• Markets may receive additional clarity next week with the release of the March Personal Consumption Expenditures (PCE) Index. Expectations call for inflation in the upper-2% to 3% range – meaningfully above the Federal Reserve’s 2% objective and indicative of persistent price pressures. This backdrop complicates the interest rate policy outlook, particularly given the potential for continued energy-related volatility tied to Middle East developments.

• Despite disruptions in the Strait of Hormuz and the risk of broader instability in global energy markets, U.S. equities have continued to advance with major indices reaching new all-time highs. The divergence suggests investors remain focused on forward-looking expectations and the prospect of eventual stabilization, even as near-term geopolitical risks remain elevated.

Fragile Ceasefire, Firm Economy – so far…

• After a day marked by escalating rhetoric—most notably threats via social media that the United States would “end civilization” in Iran absent an agreement—President Trump announced late Tuesday that a two-week ceasefire had been reached. As part of the arrangement, Iran agreed to reopen the Strait of Hormuz, albeit with control over vessel traffic. Markets responded with equities strongly rallying, oil prices declining sharply, and U.S. Treasury yields moving lower. Even so, the durability of the agreement remains highly uncertain, with meaningful questions around both compliance and longevity.

• That uncertainty surfaced almost immediately. Within a day of the announcement, reports indicate renewed Iranian attacks on regional partners including infrastructure targets in Kuwait and additional strikes in the U.A.E. Complicating matters further, Israel—America’s primary regional ally—was not involved in the negotiations and has expressed strong dissatisfaction with the terms. While vessel traffic through the Strait appears to be gradually increasing, the broader backdrop reflects a fragile equilibrium where intermittent conflict coexists with efforts to preserve the flow of critical global trade.

• Against this geopolitical backdrop, the U.S. economy continues to exhibit resilience. The March employment report materially exceeded expectations with 178,000 jobs added versus consensus estimates of 59,000. Meanwhile, the unemployment rate declined to 4.3% from 4.4% in February. Attention now turns to the Federal Reserve’s preferred inflation gauge, the PCE Index, due to be released later this week. Current expectations call for a 2.8% year-over-year increase, implying little to no month-over-month acceleration. Together, labor and inflation data will remain central to the Fed’s policy path as it navigates an increasingly uncertain global environment.

Both financial markets and the global economy confront a narrowing path due to Iranian war energy disruption…

• Fighting in the Middle East continues to escalate with Iranian forces launching attacks on Kuwait, Bahrain, and Saudi Arabia. The U.S. administration has increased efforts aimed to de-escalate the war with officials suggesting that recent discussions with Iran have been constructive. The President has directed the Pentagon to delay any major military response to allow for potential progress. Iranian leadership, however, has disputed American claims, maintaining that no direct negotiations with the United States have occurred. The divergence in messaging underscores the uncertainty surrounding any near-term conflict resolution.

• A meaningful portion of global oil supply, estimated at ~15 million barrels/day, remains stranded in the Persian Gulf due Iran’s control of the Strait of Hormuz, a critical chokepoint for energy flows. Recent reports indicate an almost complete stop in non-Iranian tanker traffic through the Strait as risks—including sea mines, drone strikes, and small-boat attacks—have sharply risen. The result is a sharp tightening in global energy supplies driving oil prices higher and prompting some nations to draw on strategic reserves or take emergency measures. Iran is willing to utilize its control of the Strait in an attempt to outlast the American and Israeli offensive.

• Against this backdrop, the Federal Reserve held its policy rate steady at last week’s meeting. However, rising energy prices are beginning to filter through to broader inflation measures, complicating an already incomplete disinflation process. With inflation still meaningfully above the Fed’s 2% target, a sustained increase in oil prices could further constrain policy flexibility and delay any interest rate easing cycle. The risk of a stagflationary environment—characterized by stagnant growth and persistent inflation—is increasing, presenting a challenging backdrop for both policymakers and markets.

Energy Tensions and Conflicting Economic Signals Cloud the Near-Term Outlook…

• Rising geopolitical tensions in the Middle East have introduced a new source of volatility across global financial markets. The primary concern centers on the Strait of Hormuz, one of the world’s most critical energy transit corridors. Iran’s threats to target commercial vessels moving through the passage has created a temporary choke point in global oil and commodity flows. Given the region’s central role in global energy distribution, this development has been enough to push energy markets sharply higher in the last 10 days and inject additional uncertainty into equities, currencies, and other asset classes.

• While such developments naturally evoke comparisons to the oil shocks of the 1970s, the U.S. economy today is structurally far less vulnerable to energy supply disruptions. Energy production now represents a smaller share of domestic economic activity, and the United States has transitioned from being a net oil importer to a net oil exporter. These structural changes provide a meaningful degree of economic insulation relative to prior decades. Even so, sustained increases in energy and commodity prices could still work their way through the economy via higher input costs and renewed pressure on consumer prices—an outcome that would complicate the current inflation trajectory.

• Against this backdrop, the Federal Reserve faces a policy environment that is becoming increasingly difficult to interpret. The two variables most central to the Fed’s decision-making—employment and inflation—are currently moving in opposite directions. February’s labor report showed an unexpected decline of roughly 92,000 jobs, contrasting with expectations for modest job growth. At the same time, inflation data released today showed headline CPI rising 2.4% year-over-year and core CPI at 2.5%, broadly in line with expectations. Markets will receive another key data point later this week with the release of the Personal Consumption Expenditures (PCE) index, which will likely play an important role in shaping the Federal Reserve’s tone when policymakers meet next week.

Tariff Escalation, Slowing Growth, and a Higher Risk Backdrop…

• Last Friday, in a 6–3 decision, the U.S. Supreme Court ruled that the Trump Administration had exceeded its authority in imposing certain tariffs on key trading partners. The decision drew immediate criticism from the president who responded swiftly. Citing the Trade Act of 1974, the Administration announced a new 15% global tariff on all goods entering the United States, effective immediately. The rapid policy shift injected renewed volatility into the financial markets as investors reassessed expectations for retaliatory actions, supply-chain disruptions, and margin pressure across import-dependent industries.

• The U.S. Bureau of Economic Analysis also released its advance estimate for fourth-quarter GDP which showed that the economy expanded at a 1.4% annualized rate in Q4 2025. This growth rate was well below the 2.5% consensus forecast and sharply slower than the third quarter’s 4.4% pace. If sustained, full-year growth of 2.2% would mark a step down from 2024’s 2.8% expansion and would be the slowest annual growth since 2022. The data reinforced a pattern of uneven growth, with momentum fading into year-end. This report occurred against a backdrop of tightening financial conditions and policy uncertainty – the economy could in fact be decelerating rather than reaccelerating.

• Last week’s Inflation data added further complexity to the economic picture. The Federal Reserve’s preferred measure, the PCE Index, showed headline inflation at 2.9% year over year and the core rate increasing at a 3.0% rate for December 2025. However, the monthly figures were firmer with core prices rising 0.4%, a pace that—if it persists—could stall further disinflation. While recent CPI readings have been closer to 2.4%, policymakers place greater weight on PCE. Combined with a fading AI-driven equity rally and emerging stress in private credit markets, the macro backdrop is shifting toward greater caution and capital discipline rather than momentum-driven risk taking.

The Labor Market Stabilizes as Inflation Remains in Focus…

• Yesterday, the Bureau of Labor Statistics reported January job growth of 130,000, materially above expectations, while unemployment declined to 4.3%. Hiring remained concentrated in healthcare, continuing a narrow but durable trend that has supported overall payroll expansion throughout 2025. While breadth remains limited, the report suggests stabilization rather than deterioration in labor conditions. From a policy standpoint, a steady unemployment rate and moderate job creation reduce immediate pressure on the Federal Reserve to accelerate easing. With this release expectations for the next rate cut shifted out to the July timeframe.

• Attention now turns to the January CPI release where the consensus anticipates headline and core inflation moderating to 2.5% year over year. Such a reading would signal incremental progress toward price stability but still leave inflation modestly above the Fed’s long-term target. In this environment, policy is likely to remain data dependent. An in-line report would confirm the current rate path while any upside surprise could challenge elevated equity valuations and cause a re-evaluation of near-term rate easing expectations.

• Finally, the January-end nomination of Kevin Warsh to succeed Jerome Powell adds meaningful uncertainty to Fed’s outlook. Although confirmation appears likely, Warsh is generally viewed as supportive of lower policy rates, continued balance sheet reduction, and a stronger dollar. However, the possibility that Powell remains on the Board beyond his chairmanship could complicate leadership dynamics. For investors, the practical implication remains unchanged: maintaining disciplined portfolios, emphasizing higher quality balance sheets, and avoiding positioning portfolios to bet on sharp shifts in monetary leadership. The coming months could prove quite interesting for monetary policy, at a minimum.

Rate cuts on Hold Amid Persistent Inflation and Slowing Consumer Momentum…

• Chair Powell and the Federal Open Market Committee announced today that they will hold the federal funds rate unchanged, marking the first policy pause since September. The decision follows three consecutive rate cuts, including December’s decrease, which revealed growing internal resistance. Two Fed governors, both appointed by President Trump, dissented against the decision and favored an additional quarter-point rate reduction.

• Going forward, the key question is when to resume cuts. The answer lies on which peril appears first, a weakening job market or inflation that convincingly resumes falling towards the Fed’s 2.0% percent target. While job growth has slowed sharply, unemployment has stabilized at around 4.4%. Meanwhile the clarity of recent inflation readings have been disrupted by the fall government shutdown. The committee is likely to require clearer evidence of economic deterioration to achieve a stronger consensus before resuming the interest rate easing cycle.

• Last week, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, was belatedly released covering the combined period of October and November. The reading came in modestly above expectations with both headline and core inflation registering at 2.8% year-over-year versus consensus estimates of 2.7%. Markets showed little reaction, reflecting both the marginal nature of the upside surprise and the increasingly dated nature of the report. Attention now turns to the December PCE release, expected late next month, and which should provide a clearer assessment of inflation trends.

• Despite equity markets reaching record highs and economic growth accelerating, the Conference Board’s January consumer confidence survey had its lowest reading since 2014. Respondents cited persistent price pressures in everyday necessities such as groceries and gasoline, alongside ongoing uncertainty surrounding trade policy and labor-market conditions. Notwithstanding commentary from the Administration, many Americans are feeling financially stretched.

• Meanwhile, earnings season is now well underway with more than 65 S&P 500 companies having reported with ~75% having delivered earnings per share above analysts’ expectations, and broadly in line with historical averages. The quarter’s earnings growth rate stands at 8.2%, largely unchanged from initial estimates. If this trend continues, it would mark the tenth consecutive quarter of year-over-year earnings expansion and underscoring the resilience of corporate profitability despite tighter financial conditions and slowing economic momentum.

The Year Begins with Elevated Geopolitical Risk as Markets Confront High Expectations…

• The year 2026 opened with an immediate geopolitical shock. Over the weekend, U.S. special forces captured former Venezuelan president Nicolás Maduro, an event that injected fresh volatility into global markets. Energy equities reacted swiftly with oil and gas shares moving higher on concerns over regional instability and potential supply disruptions. Companies with historical exposure to Venezuela and Latin America, including Chevron and ConocoPhillips, outperformed as investors repriced geopolitical risk into the energy complex.

• Looking back, 2025 delivered strong results across most major asset classes. International developed equities led performance, with several markets posting gains in excess of 25%. U.S. equities also finished the year solidly higher, driven largely by sustained enthusiasm surrounding artificial intelligence and related capital spending, leaving major indices up in the mid-teens depending on the benchmark. Fixed income provided meaningful diversification with upper single-digit returns, while cash remained unusually competitive as it offered yields north of 3%. The result was a broadly favorable environment in which both risk assets and defensive allocations contributed to returns.

• As markets progress through early 2026, sentiment can best be described as cautiously optimistic. Equity indices are trading near record highs while the federal funds rate sits at its lowest level in more than three years. Inflation appears modestly contained with recent readings below a 3% annual pace with unemployment near historic lows. However, downside risks are becoming more apparent. Economic growth has grown increasingly reliant on higher-income consumers and an AI-driven investment cycle that now represents a meaningful share of national capital expenditures. In contrast, middle-income households continue to feel pressure from elevated living costs as lower-income consumers face mounting financial strain leaving the current economic expansion more vulnerable to even modest policy missteps or demand shocks.

• This week’s labor-market data will be an important test of economic momentum. Wednesday’s JOLTS and ADP reports should offer early insight into hiring trends, but Friday’s Bureau of Labor Statistics employment report will carry the most weight. As the first non-delayed release following the recent shutdown, it will be closely watched. Consensus expectations call for the unemployment rate to rise to 4.7%, alongside a modest December job gain of roughly 57,000—figures that would reinforce concerns that labor conditions are gradually cooling as 2026 begins.

AI-Driven Volatility, Softening Labor Trends, and a More Dovish Fed Path…

• Investor attention pivoted last week from the Federal government’s reopening to the sudden fragility of the AI-driven stock trade. The core group of mega-cap beneficiaries—Amazon, Nvidia, Microsoft, Meta, Oracle, Google and Tesla—has broadly traded lower this month with Oracle down more than 20% and Google the sole advancer as it has risen almost 25% recently. Because these companies have contributed nearly half of the S&P 500’s year-to-date advance, the reversal has magnified market volatility and highlighted the degree of concentration risk embedded in the market. With AI-related capital expenditures responsible for roughly half of the year’s first-half GDP growth, a meaningful decline in these stocks could translate into real economic softness. Some analysts estimate that a 20%–30% equity decline could trim 1 to 1.5 percentage points from GDP.

• The delayed September employment report added another layer of uncertainty to investors. Hiring improved to 119,000 jobs – the strongest monthly gain since April – but significant downward revisions revealed that job creation from May through August totaled only 55,000 positions, materially weaker than initially reported. Unemployment edged up to 4.4%, reinforcing the sense that underlying labor-market momentum continues to cool. For policymakers, the landscape is increasingly uncomfortable: job growth is still positive but no longer strong enough to offset the concerns about inflation remaining above the Federal Reserve’s target.

• Attention now turns to the final Federal Open Market Committee meeting of the year where investors remain divided on whether a final 25-basis-point rate cut will be made. Expectations have swung sharply day to day as markets have digested softer labor data, elevated inflation, and rising equity volatility. Late-week reports that National Economic Council Director Kevin Hassett is the leading candidate to become the next Federal Reserve Chair added a new wrinkle to the macro-economic landscape. Hassett is viewed as being politically aligned with further easing to support economic momentum, prompting Treasury yields to fall meaningfully. The 10-year Treasury moved below 4% for the first time in months as markets priced in the possibility of a more dovish policy path under his potential leadership.                                         

Markets Rebound as Government Looks Likely to Reopen…

• Equities began the week higher despite ending the prior one on a softer note, supported by optimism that a bipartisan deal to reopen the government was imminent. Late Sunday, eight Democratic senators joined Republicans in approving a short-term funding measure, marking the likely end of the prolonged shutdown that had disrupted data releases and heightened uncertainty. While the agreement will restore basic government operations, economists expect it will take several weeks before the backlog of delayed reports is cleared, and concerns over the accuracy of federal data could linger into 2026. As a result, investors are increasingly turning to private-sector reports to assess real-time economic conditions.

• Recent private employment data has been inconsistent, reflecting a murky labor picture. ADP reported that U.S. companies added 42,000 private-sector jobs last month—a modest rebound after two months of declines while Challenger, Gray & Christmas reported a sharp rise in announced layoffs with 153,000 cuts in October alone. Year-to-date job cut announcements now exceed 1.1 million, roughly 65% higher than in the same period last year. The divergence highlights an economy in transition: job creation continues, but employers are increasingly cautious amid slowing demand and elevated financing costs.

• Consumers remain under visible strain. The University of Michigan’s November sentiment index fell to 50.3 from 53.6 in October, among the lowest readings in the survey’s history. Experts state that lower-income consumers are the most frustrated, while higher-income households are feeling less optimistic than they were at the beginning of the year. The Wall Street Journal reported earlier this year that top 10% of earners accounted for almost 50% of all consumption, underscoring how disproportionately the economy depends on affluent households to sustain demand.

• Looking at the almost completed 4^th quarter earnings season, corporate profits have generally exceeded expectations with more than 80% of S&P 500 companies reporting better-than-forecast third-quarter profits. However, equity market reactions have been muted, implying that solid results were already priced into valuations. Within the technology sector, enthusiasm for artificial intelligence investments has moderated as investors have begun to question stretched valuations and escalating capital expenditures. The recent pullback in major tech names signals a more discerning market—one increasingly focused on balance-sheet strength, profitability, and sustainable growth rather than unchecked optimism about AI-driven expansion.