The week was defined by three interlocking forces: an unresolved Middle East conflict, a resurgence in global inflation and a leadership transition at the Fed that collectively rattled financial markets and reset monetary policy expectations.
The Strait of Hormuz remained effectively closed throughout the week, with the U.S.-Iran ceasefire holding but diplomatic progress stalling. The U.S. military reported redirecting 75 commercial vessels through the strait during continuing blockade. Global oil stockpiles continued to plunge as the 75-day supply disruption showed no signs of resolution.
President Trump traveled to Beijing for a two-day summit with President Xi Jinping, the first for a U.S. leader in nine years. The two leaders agreed in principle that the strait must remain open and that Iran should not develop nuclear weapons. However, no concrete policy breakthrough emerged, leaving markets disappointed.
Oil surged on the Hormuz impasse, with Brent crude rising about 7% over the course of the week to approximately $108 a barrel. The energy shock fed directly into inflation data, as two back-to-back hotter-than-expected inflation reports spooked Treasury investors and prompted at least one Fed official to say the U.S. has an inflation problem. Kansas City Fed President Jeff Schmidt said he sees “continued inflation as the most pressing risk to the economy.”
The inflation prints and oil spike triggered a global bond selloff, with the 10-year note rising to 4.57% as of this writing, its highest level in over a year. The move driven primarily by rising real yields rather than inflation breakevens. Money markets repriced sharply, with a Fed rate hike by December 2026 now more likely than not, a dramatic reversal from near-universal rate-cut consensus that prevailed at the beginning of the week.
Jerome Powell’s term as Fed chair ends today, with Kevin Warsh officially confirmed as his successor by the Senate this week. Warsh inherits a bond market that is already effectively tightening financial conditions on its own, with yields rising independent of any Fed action. New York Fed President John Williams said he sees “no reason to raise or lower rates right now,” characterizing policy as “mildly restrictive.” Boston Fed President Susan Collins called for rates to remain on hold “for some time.”
In a report that went largely unnoticed earlier this week, the FHA announced it would be ending its pandemic-era protections for homeowners after four years. Thousands of borrowers now face massive balloon payments, negative equity and soaring tax and insurance costs as the pandemic-era relief options have been exhausted. Foreclosures of FHA-backed loans jumped 28% YoY in the first quarter, with Ron Malik, senior vice president of default operations at Dovenmuehle, a servicer for midsize banks, commenting, "We've reached a period of exhausted loss mitigation, and there's no more to give. Exhausted loss mitigation is a real thing. There's no more relief." Lenders expect foreclosures and short sales to soar over the next six to 18 months.
KEY INDICATORS THIS WEEK
Inflation – CPI: 3.7% YoY, 0.6% MoM; PPI 6.0% YoY, 1.4% MoM.
Next week – FOMC meeting minutes.