Three weeks into the US/Israel-Iran war, the economic data is telling two very different stories — one of an economy that was performing admirably before February 28, and one now bracing for a supply shock not seen in years. Somewhere between the Strait of Hormuz and the Fed’s meeting room, the macro regime has shifted meaningfully; and the difference between “temporary shock” and “regime change” is a fine line to walk. As the saying goes in energy markets: when the Strait of Hormuz sneezes, the rest of the economy catches a cold.

Executive Summary

• The US/Israel-Iran war is the defining macro event. Now in its third week with no off-ramp visible, the conflict has disrupted oil flows through the Strait of Hormuz, pushing prices above $100/barrel and triggering a historic Strategic Petroleum Reserve (SPR) release that may do more to signal duration than dampen prices.
• Inflation is re-accelerating. Producer Price Index (PPI) hit its highest level since February 2025, and the real pain has not yet registered. The oil spike in March will push the next report higher still. Headline Consumer Price Index (CPI) is now expected to average 3.3% in 2026, up 0.8 percentage points from the pre-war baseline.
• The consumer is in a squeeze. Real incomes are compressing, savings buffers are historically thin and equity markets have shed more than 4% over three weeks, precisely when wealth effects matter most. At the same time, new home sales collapsed in January, mortgage rates have climbed back to 6.22% and the long-awaited recovery is further delayed.
• The labor market is in fragile equilibrium, and the Fed is on hold, for now. Initial claims are healthy, but the “no-hire, no-fire” dynamic is increasingly vulnerable to geopolitical uncertainty. Two cuts remain the baseline of many (June and September), but financial markets are pricing a 40% chance of a rate hike, a divergence worth watching.
• AI investment and defense spending are the islands of stability in an otherwise turbulent investment outlook, with both themes structurally intact and arguably strengthening.

• The Oil Shock: It is Not the Size of the Strait, It is What Flows Through It

Industrial production was performing well prior to the outbreak of the US/Israel-Iran war, rising to its highest level since summer 2019, a strong baseline that now reads like a prewar artifact. Oil prices have surged above $100 per barrel, with global prices running more than 40% above year-ago levels in March. The International Energy Agency (IEA) coordinated a release of 400 million barrels from strategic reserves, with the US contributing 172 million barrels from the Strategic Petroleum Reserve, a historically large drawdown representing 42% of available reserves. Context matters, however: roughly 20 million barrels per day previously flowed through the now-closed Strait of Hormuz, and the IEA release falls well short of replacing that disruption. Markets may interpret the announcement as a signal the war is becoming more protracted, sending prices higher in response. For portfolios, the energy trade is not subtle: commodities, energy equities and real assets are the near-term beneficiaries of a supply shock with no clear resolution timeline.

• Key Takeaway: The oil shock is structural in its immediate impact and duration-dependent in its severity, energy assets seem to offer upside, but the real portfolio risk lies in what higher oil does downstream to consumers, manufacturers and the Fed’s optionality.

Inflation Reignites: The Pre-War Data Was Already Telling a Story
The February PPI rose a stronger-than-expected 0.7%, pushing PPI inflation to 3.4% year-over-year its highest reading since February 2025. Food prices surged 2.4% and energy 2.3%, while core PPI reached 3.9% year-over-year. Critically, none of this captures the March oil shock: with global oil prices now more than 40% above year-ago levels, the next PPI report is very likely to be worse, particularly in food, energy and transportation categories. Trade services prices remain elevated at 5.1% year-over-year as tariff volatility continues to complicate the policy landscape. A second inflation vector, the AI-driven DRAM semiconductor shortage, pushed electronic components producer prices 17.8% higher year-over-year in February. With Oxford Economics Personal Consumption Expenditures (PCE) nowcast pointing to headline PCE inflation reaching 3.5% in Q2, the window for Fed cuts has narrowed, though it has not closed. Think of it as the Fed standing in front of an open refrigerator: the house is on fire, but the cold air feels nice for now.

• Key Takeaway: Inflation is not one problem but three: an oil shock, an AI-driven supply constraint and persistent trade-related price pressures.

The Consumer Under Pressure: Thin Buffers, Thick Headwinds
The American consumer entered this crisis in decent shape, but decent is doing a lot of heavy lifting right now. With personal savings rates already at historically low levels, those buffers are thin, and higher energy prices at the pump will force difficult household trade-offs. Equity markets have shed more than 4% over the past three weeks, eroding the wealth-effect tailwind that higher-income households have relied upon as an engine of spending. With stocks now a bigger driver of consumption than housing, equity weakness matters more than it once did. The housing channel compounds the picture: new home sales plunged to 587,000 Seasonally Adjusted Annual Rate (SAAR) in January, well below consensus expectations and down 11.3% year-over-year, as winter weather and rising mortgage costs collided. The Iran war has already pushed mortgage rates up by more than 20 basis points, with the 30-year rate back to 6.22%. The inventory of completed new homes for sale remains at levels last seen in July 2009, capping the upside for housing starts until that supply is absorbed.

• Key Takeaway: The consumer is caught in a price-and-savings squeeze, with housing as an additional drag.

Labor and the Fed: Threading the Needle on a No-Hire, No-Fire Economy
Initial jobless claims fell to 205,000 in the week ended March 14, the lowest since the start of the year, with the four-week moving average declining to 210,750 and tracking 8.2% below year-ago levels. On the surface, this is a healthy labor market. But as Fed Chair Powell acknowledged, it is not a “comfortable balance.” The no-hire, no-fire dynamic, low layoffs paired with weak hiring, leaves the economy peculiarly vulnerable to uncertainty that discourages businesses from adding headcount. The Iran war is expected to keep unemployment elevated for longer, delaying the labor market improvement that would otherwise support consumer spending. For many, the baseline remains two Fed rate cuts in 2026 (June and September) with the Fed expected to look through this oil-driven inflation shock and focus on downside labor risks. Yet financial markets are currently pricing a 40% chance of a rate hike by year-end, a meaningful divergence that deserves respect as a tail risk. If inflation expectations de-anchor, or if the war proves more protracted than the baseline assumes, the Fed’s calculus shifts quickly.

• Key Takeaway: The Fed is threading a needle between an oil-driven inflation spike and a labor market that was already fragile before the war.

AI and Defense: The Structural Bright Spots in an Uncertain Landscape
Amid the turbulence, two investment themes remain structurally intact and, arguably, strengthening. The AI capital expenditure cycle shows no signs of abatement: Q1 source data confirm no sudden stop in AI investment, with the race to build out data center capacity carrying a momentum that geopolitical headwinds will not easily interrupt. The Dynamic Random-Access Memory (DRAM) semiconductor shortage — a byproduct of surging AI demand — is pushing electronic components producer prices 17.8% above year-ago levels, a feature of excess demand rather than a warning sign. The second pillar of stability is defense: last year’s Republican legislation boosted federal spending on national defense, which is now feeding into production of defense and space equipment. The One Big Beautiful Bill Act continues to support broader capital formation by raising the after-tax return on investment, though near-term uncertainty is causing most businesses outside AI and mining to defer decisions until the geopolitical picture clarifies. If the last decade was defined by smartphones and streaming, this one may well be defined by GPUs, gigawatts and guided munitions.

• Key Takeaway: AI infrastructure and defense represent two of the most durable structural investment themes available, and unlike most sectors, they are among the few where geopolitical disruption may actually accelerate spending rather than dampen it.

CIO View: The Strait Is Narrow, but the Shadow Is Long
The macro regime has shifted materially in three weeks. What began as a “steady growth with manageable inflation” environment has become an oil supply shock with layered consequences — for consumers, manufacturers, the housing market and the Federal Reserve’s room to maneuver. The base case — a short war, a partial reopening of the Strait of Hormuz by May and a consumer spending rebound in the second half of 2026 — is coherent but carries meaningful execution risk, particularly given that hostilities have escalated beyond initial expectations. GDP growth has been revised down 0.4 percentage points to 2.4% for 2026, with consumer spending bearing the primary burden of adjustment. The diplomatic calendar is now the most important “data point” of the coming weeks because the market has learned, yet again, that the Strait of Hormuz is a very small body of water with an outsized influence on everything downstream.

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