I. The War
Carl von Clausewitz, the Prussian general and military theorist, famously observed that "war is a mere continuation of politics by other means." He argued that war is never an end in itself. Instead, it is a tool used by states to achieve a specific political objective. Therefore, the military strategy must always be subordinate to the political goal. If the political aim changes, the military effort must adapt accordingly.
The US seems to be adapting to the war with Iran by amassing 50,000 American soldiers in the war zone to free the Strait of Hormuz and perhaps to occupy Kharg Island. President Donald Trump seems to hope that this latest show of force will convince the Iranians to accept his 15-point peace plan. He says progress is being made toward a deal, but the Iranians deny communicating with the US at all.
II. The Yield Curve
As a result, Brent and WTI crude oil prices remained firmly just below $110 per barrel today. Yet, the US Treasury yield curve edged lower, with the 2-year Treasury note and 10-year Treasury bond yields down 8 bps and 7 bps, respectively. Pre-war market expectations shifted from one Fed rate cut over the next 12 months to a rate hike late last week to none-and-done today(chart).
III. The Fed
Fixed-income investors welcomed dovish remarks by Fed Chair Jerome Powell today. He said, "Inflation expectations do appear to be well anchored beyond the short term." According to the March Consumer Sentiment Index survey, the five-year-ahead expected inflation rate is 3.2% (chart). That's high relative to the Fed's 2.0% inflation target, and it hasn't been very well anchored since the pandemic.
