Middle East Escalation Rattles Markets

Rates close little changed after initial risk-off rally. Swap rates plummeted in overnight trading after Israel launched counterattacks against Iran, though the move was reversed after Iran announced that little damage was caused. Rates declined as many as 15bps before climbing throughout the remainder of the session and closing ~1bp lower. Meanwhile, a 10% loss for Nvidia and 23% loss for Super Micro led a broader equity sell-off. The NASDAQ fell over 2% while the S&P 500 dropped nearly 1%.

Israel strikes Iran, prompting more concerns about oil prices. UN Secretary General Antonio Guterres said yesterday that the Middle East “is on a knife edge,” seemingly foreshadowing Israel’s retaliatory strike against Iran during the early morning hours. Immediately following the strike, crude oil prices jumped ~4% to more than $90 per barrel, only to fall afterward. Still, the price movement raised eyebrows among many who are concerned that conflict-escalation in the Middle East could impact oil markets. IMF First Deputy Managing Director Gita Gopinath said today, “There are sources of [oil] supply that buffer these shocks, but if there is a large-scale escalation in the Middle East, that is a problem.”

A recap of the week and a look ahead to PCE. This week’s rate market activity was headlined by tension in the Middle East and hawkish Fed commentary. Fed Presidents Williams and Bostic left the door open for more rate hikes, while Kashkari said it may be appropriate to hold rates steady throughout 2024. Higher-than-expected retail sales highlighted an otherwise quiet data slate, while attention is now shifted toward PCE next Friday. Core PCE is expected to remain flat MoM and fall to +2.7% from +2.8% in February, which would be its lowest level in over three years.