Inflation, Taxes, & The Middle East

Markets got spooked by a slightly higher than expected CPI report and trouble in the Middle East, on top of Tax Friday.

Typically, there’s not much to report over the weekend when crafting the Market Recap from the previous week, but not so this week. On Saturday evening (Israeli time), Iran launched missiles and drones at Israel in response to the Iranian embassy attacks in Damascus on April 1st. This response by Iran was highly telegraphed and largely unsuccessful. Both Israel and Iran have publicly stated since Saturday that they do not want to escalate the situation further. Time will tell.

Meanwhile, market futures are up slightly on Monday morning, so perhaps markets sense easing tensions.

Last week’s rollercoaster came about by Wednesday’s CPI report on inflation that rose 0.4%, versus 0.3% expected. This pushed Fed futures for the first rate cut to at least July versus the widely accepted June liftoff. Historically speaking, inflation, unemployment, and interest rates are well below the levels seen in the early 80s—a time when most economists and analysts (myself included) were still playing with Legos. Those 3 economic indicators were considerably higher in 1980 than they are today - inflation (x3), unemployment (x1.7), and interest rates (x2). Tax selling for Uncle Sam’s annual bill plagued markets on Friday, as $256 billion in capital gains tax selling hit markets. That, along with news of Iran’s threats, sent markets reeling. Trading should be interesting this week, but historically, this is typically a strong week in the markets post-tax selling.

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