The major US stock averages have opened in negative territory with the Dow, S&P and Nasdaq off at least 0.5% point.
The economic fallout from the war in Iran is hitting Americans right in the wallet, and the pain is extending far beyond just the gas pump.
Now the surge in energy prices are driving long-term interest rates higher, and Wall Street is officially tearing up its playbook.
Today.
Futures markets are pricing in a nearly 25% chance of an actual rate.
By October and with the OECD revising its US inflation forecasts up to a staggering 4.2% for the year, the Fed does find itself in a dilemma while joining me on this Friday morning is Brian Jacobsen, Chief Economist at Annex Wealth Management.
Good morning, Brian.
Thank you so much for joining me while we continue to keep an eye on that funds futures, but as an economist, do you view a rate hike as a potential probability in 2026.
Thank you for having me.
No, I think it would be foolish of the Fed to hike rates in this type of environment, to be perfectly honest.
A lot of the data, the history tells us that these types of events, when it's an oil price shock and even if oil prices stay where they are, the worst thing that the Fed can do is actually hike rates.
Now the key thing, the The caveat that they've always been talking about is wanting to make sure that inflation expectations stay anchored.
And what we've been seeing in the markets is, yes, well, near-term inflation expectations have moved higher, like with the OECD as you pointed out before, even when you're looking at market pricing for near-term inflation, those have moved higher.
But the longer-term inflation expectations have not.
And as a result, as long as those long-term inflation expectations stay contained, I think the Fed is going to try to talk tough about inflation, but they're not actually going to do anything about it because they know that a rate hike, uh, in a way, the cure would be worse than the disease.
And Brian, on this Friday morning we're continuing to monitor bonds as well as oil prices, and of course we know that energy prices affect global economies differently and the US is more insulated than say Asia as well as Europe.
But the longer the conflict in the Middle East continues, the longer it's going to affect inflation forecasts.
So in terms of what we're seeing in terms of oil as well as bonds, what do you make of the reaction?
Uh, yeah, so the market reaction, I think, is very reasonable, even though it might feel unreasonable, uh, just given all the volatility, but it's because of the wide range of possible outcomes from this, right?
What is the duration of the conflict?
Uh, how high will oil prices go?
What are the policy responses to it?
As you pointed out, in Asia, the policy responses have been very different than here in the United States.
They've even resorted to like rationing of oil, very much what.
We saw in the US back in the 1970s when there's that footage of, you know, the lines at the gas station as they're rationing gas.
They've resorted to that in other countries, but we haven't had to in the United States.
And I think that just shows that the whole story that really dominated the markets over the last few years about American exceptionalism when it comes to profitability, growth, and the markets overall, that story, I think, is still intact.
And it's really interesting because heading into 2026 when the topic of diversification for portfolios came up, it was looking at regions outside of the US, but as we have both mentioned, higher inflation also means higher rates potentially.
So a massive energy price shock is a headwind to growth and if we see gas.
At above 4 even $5 a gallon.
How quickly does consumer spending in the US actually crater?
And given the fact that we are heading into April next week, we do have a market holiday for Good Friday next week, but we are still expecting that labor market report.
So give us your expectations moving forward.
Yeah, next Friday, given that I think the markets are closed on Good Friday, but yet the data is still coming out, so it's going to be one of those days where we get the data, but the market can't really react to it.
So I'll probably be looking at Bitcoin as to how is it reacting in some of the prediction markets.
But in terms of consumers, a lot of the evidence suggests that it takes about 3 months of sustained high gasoline prices for consumers. to really change their behavior.
So initially, you get the higher gasoline prices.
People do almost immediately dip into what they would otherwise put into their savings.
So the savings rate typically goes down.
That's like the first line of defense.
The second line of defense, if those high oil prices, gasoline prices persist, is then they start changing their behavior.
Behavior in terms of what they actually spend on.
And that's where the threat to growth from high oil prices is much, I think, bigger than the threat to inflation.
The inflation thing, it would only matter if the prices go from 4 to 5 to 6 and continue to rise, right?
But the threat to growth is just about that one-time jump and what does that do to crowding out consumer spending. it and Brian, another area that we're paying attention to in the US economy is rates as well as borrowing costs.
So the 30 year mortgage climbed yet yet once again and earlier we saw that report of rates actually north of 6.2% again.
So at what point does the American consumer tap out under the weight of some of these borrowing costs?
Yeah, the American consumer was almost getting back into the game because as rates were going down, but now it's almost like, well, you know, they're not in the ring anymore.
They weren't tapped in, uh, mostly because they're tapped out in terms of high financing costs.
You have a weak job market.
Uh, you do still have decent wage gains, but we'll have to see how long that persists, right?
So, I think that the consumer, that story about the K-shaped economy is still in place.
It's likely to stick around for a while and Plus, this could be a little bit more challenging because with the market moving lower, right, about 40% of American household wealth is tied to the stock market.
So to the extent that the upper echelon of American consumers were driving all the spending based on the wealth effect, that wealth effect can really move in reverse, and that's what is likely to happen.
So, that's why I, I'm convinced that President Trump knows that risk.
He sees it, and that's probably why he's going to try to find an off-ramp, uh, fairly soon.
Brian, you bring up an important point about the decline we're seeing in valuation as well as market cap for the major US stock averages because given rising oil prices and gas prices that would indeed be a double whammy.
So Brian, I appreciate your time on this Friday morning.
So thank you so much for joining us and have a good weekend.
My pleasure.
Thank you.
