Troubling signals in the US bond market are drawing comparisons to the 2008 financial crisis, but the US economy is far less reliant on oil today than it was 18 years ago.
And now surging oil prices have pushed the two-year Treasury yield above the Fed's target rate.
And the March meeting saw in 11 to 1 vote holding the target rate steady as widely expected, but it was definitely one for the books that Jay Powell uttered words that immediately roiled equities saying higher energy prices will push up overall inflation.
Well joining me on this Friday morning is Sonu Varghese, VP, Global Macro Strategist at Carson Group.
Good morning.
So thank you so much for joining me.
While the stock market entered 2026 at its second prices valuation in history, and here we are.
So given that we heard from Powell after the conclusion of the two day meeting, how vulnerable do you think equity evaluations are right now?
Look, we, as you said, as we came into this year, equity valuations were stretched, but at the same time, those are in certain pockets of the market.
Maybe technology and all the optimism around technology and the AI infrastructure buildout had stretched valuations on that side.
But there were other parts of the market that were attractive and are honestly still attractive, you know, whether you look at industrials, obviously energy has been doing well recently over Several weeks, but look, energy was doing well even before this crisis all the way back in late January and into February.
The rest of the world, you look at developed markets, stock markets, emerging markets, stock markets, those are also doing well.
Yes, there was a valuation story that was likely stretched on the technology side, but you know there were other pockets that were Relatively cheap compared to technology, and we saw a lot of opportunities there.
Of course.
Now everything happening in the Middle East has sort of upended that and then, you know, with what the Federal Reserve came out and said they held rates steady, but honestly it was a little confusing as to what their outlook is.
I am puzzled by the fact that they think rates could go lower from here, and I thought they had an inflation problem even before the crisis, Remy.
Yes, and you bring up a lot of important points because when we take a step back and look at the performance of sectors on the S&P 500, as you mentioned, 2026 has been quite the divergence from 2025.
But when we take a closer look at what Powell said, he used some form of the world word uncertain more than half a dozen times and right now we are.
Looking at gasoline as well as diesel prices surging, and the average price of a gallon of gasoline this morning, according to AAA, is above that $3.90 mark.
So walk us through the reality of the energy supply chain and the timeline back to normal when the conflict eventually does end.
Look, I won't pretend to know or I won't even try to guess when the conflict will end.
It's been 3 weeks.
We're on day 21 of the crisis.
I don't think a lot of people expected this to go beyond 7 or 10 days, so we are beyond initial expectations, right?
That said, look, you showed a chart earlier about of WTI, which is sitting around $95 a barrel.
Brent is sitting, you know, well above that, about $107. $18 a barrel that tells you there's a lot of scarcity, right?
The rest of the world, especially Asia, but even Europe, need barrels of oil for refining into, you know, other products, whether it's diesel, jet fuel, shipping fuel, oil, things like that, you know.
And then downstream of that you need, you know, all sorts of goods plastic, synthetic rubber, resins, foams, you know, that we use for everyday goods, and the prices for all of that is going to go up.
Because of the fact that there are a lot of barrels of oil that need to flow through the Strait of Hormuz that's not currently flowing, right?
And this is why it's puzzling when even the Fed, when they sort of alluded to the fact that maybe we look through this energy shock, I don't think it's going to be just an energy shock.
Jet fuel prices will translate into airfares.
That's part of core inflation.
Food prices because of higher diesel prices.
You mentioned nationwide average gasoline prices are heading close to $4 a gallon.
Diesel prices are above $5 a gallon.
That's going to impact food prices because you need to transport this stuff on trucks and things like that.
So that's going to feed into restaurant prices as well.
That hey, that's part of core inflation.
So as I was saying, the Federal Reserve had an inflation problem even before the crisis.
Inflation was going the wrong way.
Now they say it's mostly attributable to core goods inflation because of tariffs.
I don't think that's the only problem.
I think services inflation is also pretty high. and they have a problem there.
But the big picture is, look, Remi, we've had 5 shocks over the last 5 years.
We've had the COVID supply chain crisis.
We've had the Russia-Ukraine war which sent oil prices higher.
We've had the tariffs.
We've had the immigration shock, and now we have the crisis in the Middle East.
And you can look through any one of these shocks and say, OK, that too will pass, but A series of them that push inflation higher means the Fed's 2% target is nowhere in reach.
Yes, and you bring up a lot of important points regarding the macro picture, so it's not really surprising that the updated dot plot from the Federal Reserve looks like a maze or a puzzle that we can't yet solve.
And at the same time, Sony, the Atlanta.
The Fed is assigning higher odds to a rate hike over the next 3 months.
So what should the markets make of this massive divergence we're seeing amongst the policymakers and tell us what the option markets are actually telling you about the rate outlook moving forward.
The option markets are telling us that there's a very high probability that the Fed will increase interest rates this year.
That is not the base case.
I think the base case right now, as far as markets are concerned, is that they will not cut, nor will they hike.
But a few weeks ago before the crisis, the probability of a rate hike, an interest rate increase, was under 10%.
It was close to about 5%.
And 7%.
That's gone up now to 35-40% again, like I said, that's not the base case.
You still have 60% odds of no hike, but yeah, I think this will cause volatility and by the time, just the way inflation numbers work, by the time we get, you know, the inflation data where we see all the impact of what's happening now in the Middle East feed through into core goods inflation and things like that, it's going to be May and June.
But the longer the Fed waits to potentially pivot, that means it's going to make it harder for them to pivot, and when they do pivot, that's going to cause a lot of market volatility.
Yes, and finally, Sony, before I let you go, I do want to get your take on the US currency.
Here.
We are about to wrap up Q1, and there's been a lot of volatility across all the currencies.
So what do you make of the US dollar as we head into Q2?
Two things.
One is, look, we export, we as in the US exports more petroleum.
Than we import in terms of overall petroleum products, we do import a lot of oil, but on net we have a petroleum trade surplus that by itself should be positive for the currency when energy prices are going up.
And then you have the other impact of look if markets think.
Rates are going higher.
That makes US Treasury yields more attractive.
You would think more funny.
Money flows into the dollar as an, you know, as downstream of that.
And, you know, if you have a bit of a risk off environment, the cleanest shirt in a dirty laundry is the US dollar.
So you have a few things going for why the dollar is moving higher as opposed to lower.
Well, I do like that analogy, Sonu, but we will have to leave it there for today.
So thank you so much for joining us on this Friday morning.
And as always, thank you so much for sharing all of your insights.
Thank you for having me.
