Middle East Conflict & Fed Keep Markets Down

Most equity sectors take another weekly loss as the conflict in the Middle East continues. While strikes by U.S. and Israeli forces continued hammering missile sites

in Iran over the weekend, new revelations of some kind of ceasefire talks have emerged. U.S. officials let it leak over the weekend that there were conditions being discussed (see table) to bring the conflict to a conclusion. Then, suddenly this morning, the President announced that the US and Iran have had productive discussions over the past 2 days and that he was postponing any new military strikes on Iranian key infrastructure for a five-day period. So far, in early futures trading this morning, equity markets are up more than 2%, while oil prices have plummeted and precious metals have pared losses.

Last week, as widely expected, the Fed left rates as is, but what was more anticipated was Powell's press conference and the updated economic projections. The Fed's Dot-

plot remained unchanged from the previous meeting - i.e., one rate cut in '26 and one cut in '27. However, markets are now forecasting no rate cuts in '26. That would likely depend upon how quickly the conflict in Iran could come to a conclusion. In addition, the Fed changed their inflation projections from the previous meeting bumping up PCE from 2.4% in 2026 to 2.7%. Similarly, 2027's projection for PCE was moved up to 2.2% from 2.1% previously. These changes, plus Powell indicating he would be willing to stay on if the Senate failed to confirm the next Fed Chairman left doubt that hung over the market on Wednesday.

Regardless of the progress being made on the Middle East conflict, March is likely to provide an inflation shock to the market. Since the beginning of March (which is

approximately when the Iranian conflict began) the price of gas has risen from $2.90/gallon to $3.89/gallon. Consumers will feel this pinch when they fill up their gas tanks and that will likely be reflected in the inflation data. The Cleveland Fed is projecting March's CPI number to come in at +0.6% on a month-over-month basis and +3.0% on a year-over-year basis. This would be a substantial increase over the February measurements. If this proves to be a temporary shock, we should see the inflation number come back down relatively quickly with a reduction in oil prices. However, even with a quick resolution in the conflict, it will take some time - maybe months - for oil inventories to adjust.

Despite the pullback in AI, private credit woes, and the Iran conflict, the broader economic picture has still not shown the typical signs of an imminent recession. The

two subindices of the Chicago National Financial Conditions Index - Credit and Risk - tend to pinpoint more volatile areas of the economy and usually trigger earlier warning signs than the broader index. Currently, both subindices remain below zero, meaning conditions are loose, and are below the levels seen during tariff increases last year. Industrial and Manufacturing production both came in better than expected last week and are above pre-recessionary levels. Initial Jobless Claims and Redbook Sales show a consumer that remains resilient. Ceasefire negotiations may be back-and-forth, so expect more trading volatility as the talks progress.

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