Iran-Israel Attacks Fuel Inflationary Concerns

Yield curve steepens following Iran-Israel attacks. After relatively weak CPI and PPI data eased nerves about tariff-driven price pressures, a new inflationary threat emerged: war in the Middle East. Oil prices surged in the aftermath of last night’s airstrikes, with Brent and WTI crude both rising ~7.5% today to $73-$75 per barrel. Markets fear that increased oil prices could have a widespread impact on the economy, as reflected by today’s steepening of the curve. Yields climbed 4-6 bps, with the 2-year at 3.95% and the 10-year at 4.40%. Equities declined in a risk-off move, with the S&P 500 and NASDAQ down 1.13% and 1.30%, respectively.

Middle East conflict boils. A persistent conflict in the Middle East has just intensified after Israel launched direct strikes on Iranian military and nuclear facilities. In turn, Iran responded with drone strikes and, most recently, hundreds of missile strikes that have prompted US assistance to help intercept. The latest developments mark a profound escalation in the region and have stoked fears of a wider war. President Trump’s latest remarks on the matter have only added to the uncertainty, saying that Iran should make a nuclear deal “before its too late” and that additional attacks currently being planned will be “even more brutal.” Anticipating a possible slowdown in Iranian oil output related to a conflict, JPMorgan Chase sees a reduction in global output of more than 2.1 million barrels per day.

FOMC meeting looms next week. The fourth 2025 policy meeting will ensue next week, and the Fed is expected to hold rates steady again, despite calls from President Trump to slash rates by 1%. Chair Powell and several other Fed officials have argued that the uncertain environment, coupled with a generally robust economy, warrants a wait-and-see approach. The Fed is widely expected to resume rate cuts in September, and Fed Funds futures have 2 moves priced in for the calendar year. The Fed is also set to release an updated Dot Plot after March’s rendition had a median Fed Funds forecast of 3.875% for the end of 2025.