Wall Street may be eyeing a macro regime change driven by the escalating conflict in the Middle East.
We are looking at oil, both WTI as well as Brent, well above $100 a barrel and the VIX, surpassing $30 to hit its highest level in almost a year.
Now US stock futures may be up this morning, but the S&P 500 capped its longest losing streak since 2022 and the Nasdaq sank into correction territory.
While this morning global bond yields are pulling back.
Investors turned their attention from the war's impact of inflation to its impact on economic growth.
Now joining me this morning live here at the New York Stock Exchange is Joe Brusuelas, Principal and Chief Economist for RSM US LLP.
So great to have you here.
Thank you so much for joining me.
Thank you.
Well, we are counting down to the end of Q1 2026 and what a quarter it has been.
So first, ahead of the market open, we're looking at global government bonds higher.
What is that telling you?
Global investors are pricing in the onset of recession primarily in Asia, with real risk about Europe, and they're beginning to think about the longer term prospects of growth caused by the war in the Middle East.
You know, we were promised a 4 to 6 week excursion.
We're in week 5.
My sense is it's probably 4 to 5 months.
That's why you're seeing that decline in yields this morning.
But you know we're at the start of the week.
Each week of this war, markets tend to float higher on the Monday only then to fade later on.
So to me what I'm seeing in equities is a little bit of a relief rally.
The real price signal, I think, is in that bond market where we're going to have a tug of war between slow growth and inflation for the next several weeks. and you bring up an important point because depending on what part of the world you're in you're.
By rising oil prices prices, and you mentioned what's happening in Asia versus Europe and the US.
So first and foremost, when it comes to what we're seeing in US equities, what are you expecting in the short term?
OK, my expectation is a modest selloff here until we get clarity on what the direction of the war is and what the duration of the war is.
It doesn't mean a 20%. decline in a short period of time.
I think what it really means is risk averse investors who are looking for a place to park money due to the elevated uncertainty caused by the policy sector in Washington.
It's that policy uncertainty whether it's these endless trade wars or the actual hot war going on right now.
There's just not a lot of impetus to put money in risk assets like equities.
Yes, and you bring up a lot of important points, and when we take a step back, we have to keep in mind that 2026 is a midterm election year, and there are a lot of issues regarding policy that we have to keep in mind.
But when it comes to the US central bank, particularly the Federal Reserve, and what it will do moving forward given where we are, what are your expectations for 2026 and beyond?
OK, so in the near term, the Fed will and should do nothing.
Absolutely nothing.
It needs to sit and be patient.
The central bank has poor power to add or detract from the situation.
Since this started, we've been very clear about what we thought this meant for the Fed.
The Fed can create electronic reserves.
The Treasury can print money.
Neither the Treasury nor the Fed can print oil.
We're going through a classic supply shock.
Depending on the evolution of the war, how bad the supply shock gets, we could get inflation, which is what we're going to get in the near term, and the Fed is going to look right through that.
Right, and if the duration of the war is shorter than what I'm thinking, well then what we'll end up with is a little disinflation on the other side of this, and then the Fed can think about moving rates towards what it considers to be the terminal rate of 3.1%.
Now this year has just been thrown into disarray.
It's really hard to make a forecast anything more than 2 to 3 months out.
So I'm not going to be the fool and do that.
What I'm going to tell you is that don't expect any moves from the Fed during the 2nd quarter of the year.
Check back in at the June meeting and then we'll probably have a better sense because.
I would think that that very disposable summary of economic projections that the Fed put on the table in March, and that was utterly the most disposable forecast one can put forward, will go away and we'll get a more pointed forecast about where they think things are moving.
But for now if you're an equity investor, if you're an investor in risk assets, if you're part of team leverage, don't expect an assist from the Fed anytime soon.
Joe, one thing is for certain, and that is There's plenty of uncertainty, but we do have to keep in mind that we will be getting an important data point later on this week on Friday morning when US markets will be closed.
But of course we'll be paying attention to non-farm payrolls, the finer details, including the unemployment rate.
So what are your expectations as we head into the week?
I'm expecting the unemployment rate, which really is the most important portion of this given what's going on, because when you have oil shocks, you tend to see the unemployment rate increase.
I'm expecting right.
4.4, 4.5%.
We'll see enough jobs to keep the labor market stable, but really all you're talking about is healthcare and education.
You're getting a little bit of a rebound because we had a weather-induced strike induced report, so you're going to get a lot of noise, not very good signal out of this.
I think if I'm out there and I'm really looking at this, what you want to do is you want to dig deep into the composition of hiring.
See if anything stands out beyond the rebound that you're going to see this month, you know, for the last 6 months.
If you look at private sector hiring, excluding healthcare and private education, it's not happening.
And that's a real problem that's not going to go away.
But again, it's the unemployment rate that really matters and that's about it.
So for Americans that are watching right now and are trying to make heads or tails of what's actually unfolding here, what would you say to them at a time when we're looking at the average of a gallon of regular gasoline creeping higher to 4 and of course these expectations regarding fiscal monetary policy are still hanging in the background.
Especially as tax season approaches, so since that fateful Saturday, the last Saturday of February, we've tried to explain this in very simple and accessible terms.
So for every $10 increase in the price per barrel of oil, you're going to get a 0.1% drag on GDP, and you get a 0.1% increase in inflation.
What that means for your gallon of gasoline is you should see a 24 cents increase for every $10 per barrel.
OK, where are the pain points?
The US is a great big $30 trillion economy.
It can take a big shock, right?
And it is, and it has, and it will.
But it too has its pain points.
We thought you wouldn't see wholesale demand destruction set in until oil reached about $125 a barrel.
Now we're at $68 a barrel, so almost a 50% increase.
We're moving there.
We're not quite there, but we're getting there.
Gasoline would really need to be about $4.25 per barrel, not 4, which is where we're at.
We're at 399 cents today.
Overall, we think the energy, once you include all energy, that subtracts about $450 a year from US households.
It's not anything anybody likes, but we can take it now.
Should we see oil breach 125, move towards $140 150.
That 30% probability of a recession I have on the table, well, that will move well above 50%, and then we'll really start talking about a recession in North America.
But if you're out there, you want to start thinking about can I work at home more.
You know what, can we get the kids in the carpool?
Can we be really efficient, go to the grocery store one time a week rather than 3 on the margins where you can start saving, and that's where Americans really have to start thinking.
