Three Months Into the Gulf Conflict, Markets Face Inflation Pressure

Three months after the onset of military action between the United States, Israel, and Iran, the initial timeline for a short-lived campaign has dissolved. With shipping through the Strait of Hormuz at a virtual standstill, global markets are bracing for the economic fallout of prolonged regional instability.

Brent crude prices climbed over 1% on Thursday following an overnight exchange of missile fire between the U.S. and Iran, reversing previous optimism regarding a potential peace deal. While Asian markets closed lower and Wall Street futures dipped, the physical disruption of energy supplies remains the primary concern. The economic impact is set to sharpen today as April personal consumption expenditures (PCE) data arrives; inflation is projected to hit 3.8%, nearly doubling the Federal Reserve’s target.

This inflationary environment bolsters hawkish sentiment ahead of the June Federal Reserve meeting. Board member Lisa Cook signaled a willingness to raise interest rates should disinflation fail to materialize. Meanwhile, the mortgage sector reflects the tightening conditions, as the average 30-year fixed-rate mortgage rose to 6.65% in the week ended May 22, according to the Mortgage Bankers Association. Investors are also monitoring potential shifts in transparency at the central bank, as speculation grows that new chair Kevin Warsh may consider abandoning the "dot plot" forward guidance system.