Fresh Risks For Financial Markets

March was a fresh reminder of how quickly the narrative can change in financial markets.

At the end of February, fed funds futures were priced for 60 basis points of rate cuts by the Fed in 2026. By the end of March, those projected rate cuts effectively disappeared. This coincided with a sharp increase in Treasury yields across the curve as oil prices surged higher than $100 per barrel amid the ongoing military conflict in the Middle East, which has greatly constricted the flow of energy and other materials through the critical Strait of Hormuz.

For much of March, the concern was inflation risk from a supply shock to energy prices, but by the end of the month, the bond market shifted somewhat to economic growth worries via demand destruction.

It has been a fluid situation, and the most pressing questions are:
• How long will this conflict last?
• How long will the Strait of Hormuz remain closed?

The answers to these questions will impact the ultimate economic costs.

Tracking a measure of market inflation expectations via TIPS breakeven yields, all three measures (1-year, 2-year and 5-year) are higher over the last month, but the market clearly views any inflation impact as a more short-lived phenomenon given the sharper run-up in the 1-year breakeven yield. This also underscores the idea of a prolonged oil price shock weighing on global economic growth, which is deflationary by nature.

On March 31, markets received some relief when the Wall Street Journal reported that President Trump was considering ending U.S. military involvement even if the Strait of Hormuz remained closed. On April 1, President Trump addressed the nation and said the war in Iran is “very close” to completion while also threatening escalation. The initial reaction from financial markets was higher oil prices and lower stock prices.

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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

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