This evening, Reuters reports that ship traffic through the Strait of Hormuz was well below 10% of normal volumes on Thursday, despite the US-Iran ceasefire. Tehran asserted its control by warning ships to remain within its territorial waters as they passed through the Strait to avoid mines. As we've noted previously, geopolitical crises tend to provide buying opportunities in the stock market. Sure enough: Following a 9.1% pullback from January 27 through March 30, which occurred mostly in March because of the war, the S&P 500 is up 7.6% through today's close, led by a 9.6% rise in the Magnificent 7.
Stock investors are clearly betting that the hot war will continue to cool off. That's been our bet since late Tuesday, March 31, when we wrote that the market probably bottomed the day before. On the other hand, we think that bond investors should be more concerned that inflation was heating up just before the war, and now will continue to do so, probably through the end of this year. We are still counting on productivity to offset the war's inflationary consequences. But we are on alert. Here's why:
Pre-War Inflation
During January and February, the two months before the war, the CPI inflation rate was slightly cooler than expected at 2.4% y/y in both months. However, both the headline and core PPI inflation rates were hotter than expected. So was import price inflation, which was expected to moderate as the effects of Trump's 2025 tariffs wore off.
Today we learned that the headline and core PCED price indexes both rose 0.4% m/m in February. On a year-over-year basis, both measures stopped falling and stalled around 3.0% (above the Fed's 2% inflation target) over the past year as Trump's tariffs boosted goods prices, especially durable goods prices (chart). Services inflation continued to moderate, led by cooling shelter inflation.
