Middle East conflict swings back and forth

Optimism around a resolution in the Middle East helped drive a recovery in stocks last week, with the S&P 500 once again reaching new all-time highs last week. Elsewhere, US Treasury yields fell modestly, while crude oil finished the week meaningfully lower in response to the hopeful news. But the weekend inserted uncertainty again, when the US seized an Iranian cargo ship in the Strait of Hormuz.

First-quarter earnings season is now getting underway. The largest US banks posted strong results last week, supported by their trading businesses, which benefited from elevated market volatility. A pair of semiconductor companies raised their full-year sales forecasts on the back of strong demand, a sign there is little let-up in AI-related spending. Early consumer trends were more mixed as some high-profile European luxury brands reported disappointing sales. 

On the data front, initial jobless claims fell slightly week-over-week and remain at subdued levels. March producer price index (PPI) data also came in softer than expected, despite an 8.5% increase in energy prices during the month.

The Federal Reserve most likely remains in “wait and see” mode as it evaluates the potential impacts of the Iran war. Fed Governor Miran, one of the more outspoken dovish members of the committee, continues to call for multiple cuts, though he has gradually reduced those expectations. During the last Federal Open Market Committee (FOMC) meeting, he penciled in four cuts, down from six prior and last week signaled he may be closer to three, as core inflation trends had become “less favorable” even before the war. Looking ahead, the Senate nomination hearings for Kevin Warsh to succeed Jerome Powell as chair of the Fed Board of Governors is scheduled to begin next week, and the FOMC will meet April 28-29.