Central Banks Lean Hawkish as Inflation Risks Rise

Stocks extended their losing streak to four weeks amid ongoing concerns around the conflict in the Middle East. The S&P 500 is now down 7.1% since its highs the end of January and down 4.9% since the beginning of the year, while the Russell 2000 (index of small cap companies) is the first to hit correction territory, defined as a decline of 10% or more.

Oil was down slightly for the week but continues to hover near $100 per barrel with headlines dominated by the economic implications of higher oil prices. Oil is up almost 50% since the conflict began while the average price per gallon of gasoline in the US is around $3.95, about one dollar more than a month ago, per AAA.

There were several more developments last week in Iran, with strikes escalating after Israel hit Iran’s Pars Gas Field, which is the largest natural gas field in the world and a major revenue source for Iran. In retaliation, Iran struck Qatar’s Ras Laffan Industrial City, home to the largest LNG export facility in the world (could impact 20% of Qatar’s LNG capacity for up to five years).

Some say the fresh strikes could mean the situation lasts until at least May, but later in the week Trump said Israel and the US will no longer target Iran oil infrastructure. The concern now is whether Iran escalates more and US gets military personnel on the ground in Iran, or if Iran agrees to negotiate and we see a de-escalation.

Higher energy prices have reignited inflation concerns. Saudi Arabia warned that oil could climb to $180 per barrel or higher if supply disruptions persist beyond April, particularly if the Strait of Hormuz remains closed.

Central banks around the world held policy meetings last week and decisions were made across the board to hold policy steady (no changes in interest rates), emphasizing rising inflation risks and increased uncertainty while opting to wait for greater clarity before adjusting rates. As a result, expectations for rate cuts this year have diminished meaningfully, with markets now beginning to price in the possibility of rate hikes—an outcome that carried virtually no probability for much of the past year.

The Federal Reserve held its meeting and policymakers also voted to keep rates unchanged, while officials' projections and Powell's press conference leaned more hawkish. Outside of adding a line on the uncertainty in the Middle East, the policy statement was basically unchanged.

In the press conference Chairman Jerome Powell noted the unemployment rate has been stable the past several months while saying most officials believe there has been zero net job creation in the private sector, although said that is about what the economy needs in terms of dealing with very low labor force growth (mostly from a lack of immigration).

Importantly, Powell indicated the risks to employment and inflation are basically equal. There were comments on the risks to inflation from the oil price shock, with Powell acknowledging that could cause trouble for inflation expectations. However, the current policy stance is viewed as “mildly restrictive” by Fed members and they believe it is the right place to be with inflation, particularly services inflation which has been “frustrating” according to Powell, remaining too high.

Markets are no longer pricing in rate cuts and in fact, are now pricing in a small probability the Fed will raise rates by the end of the year, a significant difference from the expectations several weeks ago (when there was a near certain chance of two rate cuts by year-end). This has helped push up bond yields across the board – US Treasuries are now lower for the year as yields have moved to the highest level in months. The 2-year Treasury yield is up 52 basis points on the year to 3.91% while the 10-year yield is up 44 basis points to 4.39%, both the highest since July.

The other big event last week was Nvidia’s GTC developers conference. The most notable point came when Nvidia CEO Jensen Huang revealed the company sees its AI chip demand hitting $1 trillion by 2027, well above the $500 billion he announced at the GTC conference in October. His keynote speech also highlighted how AI agents will be the next computing paradigm, saying everything will move from chatbots to autonomous AI workers - highlighting its OpenClaw platform, saying every company needs an OpenClaw strategy.

Despite this, the stock has been relatively unchanged over the past seven months.



This week there will be a lull in economic data and earnings reports, leaving the markets focused on developments in the Middle East. Early Monday morning stocks are on track to open much higher after Trump posted the US has had "good and productive conversations" with Iran and strikes against it will pause for five days.

Recent Economic Data



• Producer Price Index: The producer price index increased 0.7% in February, much more than the 0.3% increase expected, and coming after a 0.5% increase in January. Food prices rose 2.4% while energy prices rose 2.3%, generating a solid amount of the increase. However, even with excluding these two volatile categories, prices were still up 0.5% (after being up 0.8% in January). Prices of final demand services increased 0.5%, with trade up 0.4%, transportation /warehousing up 0.5% and others up 0.6%. The headline producer price index is up 3.4% over the past year, accelerating from 2.9% last month, and up 3.5% excluding food and energy.

• Retail Sales: Delayed

• Housing Market Index: The housing market index, an index of homebuilder sentiment, was 38 for March, holding steady for the for the sixth consecutive month although these are relatively low levels of sentiment. The index on present sales was 42, the index on expected sales over the next six months was 49, while the index on traffic of prospective buyers was 29. These levels all improved in the month but remain in the same range of the past six months.

• Housing Starts & Permits: Delayed

• Empire State Manufacturing Index: The Empire State Manufacturing index was -0.2 for March, falling from 7.1 in February indicating manufacturing in the New York region slowed in the month after a decent expansion last month with only 30% of the firms reporting increasing activity with the same percentage reporting declining activity. Employment grew slightly while input price increases moderated and selling price increases were steady.

• Philly Fed Manufacturing Index: The Philly Fed manufacturing index was 18.1 in March, a slight increase from February, and as opposed to the Empire State index, suggested manufacturing conditions expanded at a solid pace in the Philly region in the first two weeks of the month. Nearly 40% of firms reported increases in activity, double the number reporting declines, with about 35% reporting no change.

• Industrial Production: Total industrial production increased 0.2% in February, in line with the increase that was expected but a slowdown from the strong 0.7% increase in January. The increase was driven by a 0.2% increase in manufacturing and a 0.8% increase in mining, offset by a 0.6% decline in utilities which may have been due to the warmer month. Utilization of capacity was at 76.3%, unchanged in the month but up a solid 1.4% over the past year.

• Jobless Claims: The number of unemployment claims the week ended March 14 was 205,000, a decline of 8,000 from the week prior, bringing the four-week average down slightly to 210,750. The number of continuing claims ticked up to 1.857 million with the four-week average down slightly to 1.851 million.

Company News



• OpenAI: The WSJ said OpenAI is making plans to shift its strategy to cut back on side projects and instead focus its efforts to push to “nail” its core business. The report said OpenAI is recognizing its “do everything at once” strategy, which it says has put it on defensive.

• Delta: Delta shares moved higher after providing a business update, saying it sees strong demand continuing in March, with “accelerating trends in consumer and corporate demand,” and as a result believes its Q1 revenue will grow faster than its prior forecast. However, the higher growth will be offset with higher fuel prices, so its earnings forecast was unchanged.

• Nebius: Shares of Nebius were up over 15% last Monday after Meta said it has agreed to spend $27 billion over the next five years to access AI infrastructure from Nebius. The data center infrastructure provider will supply $12 billion of capacity of Nvidia’s newest GPU architecture, the Vera Rubin platform, starting in 2027, with another $15 billion across other Nebius clusters.

• Six Flags Entertainment: Activist investor Jana Partners is calling for Six Flags to explore a sale and to end an era of mismanagement by seeking a new Chair of the board, according to Reuters, citing a letter. The letter said the board has displayed an “alarming pattern of dysfunction and disjointed decision-making” and only a sale will stop a “vomit-inducing ride” for shareholders. In 2024, Six Flags merged with Cedar Fair (owner of Cedar Point).

• Unilever: Bloomberg reported Unilever is considering separating its food business, currently speaking with advisors to evaluate the possibility of separating the whole business or holding onto some brands and separating the remainder. It added the food business could see interest from potential buyers and could be valued at tens of billions of dollars.



• Boeing: Boeing signaled it will have several performance issues weigh on its first quarter results, including fewer than planned deliveries of planes, wiring defects in its 737 Max, and the cost of running around a key supplier. It also said it is pushing back its goal of generating positive margins at its commercial airplane business by a year as its integration of its recently acquired supplier, Spirit AeroSystems, weighs on profitability.

• Super Micro Computer: Shares of Super Micro were down double-digits after it was reported the US has charged one of its co-founders Yih-Shyan Liaw and two others with illegally smuggling billions of dollars of Nvidia powered servers to China. 

Other News



• Quarterly Earnings Reports to Semi-Annual: The Wall Street Journal reported the SEC is preparing a proposal that would end the requirement for public companies to report earnings on a quarterly basis. The proposal would instead require public companies to report semi-annually, though the company could still report quarterly if it desired. Before publishing the proposal, the SEC is discussing with officials at exchanges how they would need to change their rules. Among many other reasons, opponents say it would reduce transparency while proponents say it could increase the number of public companies and reduce the costly clerical work required to satisfy the quarterly requirements.

• Trump/Xi Meeting Delay: President Trump said he has asked China’s President Xi to delay his visit to Beijing by a month or so due to the conflict in Iran. Trump’s visit was originally scheduled for March 31-April 2. Previous comments by Trump noted he floated the idea of delaying the meeting unless China helped the US remove the blockage of the Strait of Hormuz.

• Central Bank Updates:
• The European Central Bank held its interest rates steady at 2% for the sixth straight meeting and warned energy will have a material impact on inflation over the short-term which may lead policymakers to discuss rate hikes in the coming months.
• The Bank of England held its interest rate steady at 3.75% and said it stands ready to act against inflation if it rises due to the war in the Middle East.
• The Swiss National Bank left its policy rates unchanged and reiterated its willing and readiness to intervene in the currency market due to the recent strength in the Swiss franc.
• Sweden’s central bank, Riksbank, left its policy rates unchanged while lowering its forecast for growth and raising its forecast for inflation. It said it plans to hold steady this year as it waits for more clarity on the impact from the situation in the Middle East.
• The Bank of Japan held its interest rates unchanged, warning the conflict in the Middle East poses a risk to its outlook. 
• The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.10%.

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