The energy crisis set off by the war in Iran is escalating. U.S. fuel prices have surged well above $3 per gallon, and they’re set to rise further. President Donald Trump wrote on social media overnight that rising oil prices were “a very small price to pay” for winning the war, though many voters may question that.
The worrying thing for central banks and investors is that this latest inflationary spur comes after Friday’s surprisingly weak U.S. employment report. The data may have been skewed by bad weather in February, but there were few positive points and many signs that the labor market has stalled.
This raises the dark prospect of ‘stagflation’ - slow or no growth coupled with mounting price rises. How the Fed and other central banks react to that is very much an open question. Most likely, they will just stand pat for longer, which is apt to please almost no one.
The renewed inflation concerns have rattled global bond markets, intensifying last week's selloff and sending yields higher - especially in Britain, where two-year gilt yields are on track for their biggest one-day rise since 2022.
Meantime, stock markets tumbled around the world, with Japan’s Nikkei losing over 5% and South Korea’s high-flying KOSPI shedding nearly 6%. That comes on top of losses last week of 5.5% and more than 10% for those indexes, respectively.
U.S. stock futures are down more than 1% before the bell and - much like last week - the greenback climbed as investors sought safety in the liquidity of dollar cash. Gold, usually the most reliable safe haven, once again failed to rise to the occasion, weighed by the stronger dollar and climbing Treasury yields.
Markets will now look to see if countries begin tapping their national oil reserves to stem the bleeding, with reports on Monday suggesting G7 finance ministers would discuss a joint release from emergency reserves.
Meantime, U.S. Senate Democratic Leader Chuck Schumer called on President Trump to release oil from the U.S. Strategic Petroleum Reserve, a move the president has so far not supported.
How far or for how long any of that can alleviate the situation remains to be seen as the crisis itself deepens, with Gulf states continuing to cut output amid persistent threats to shipping through the vital Strait of Hormuz.
Meantime, Tehran appears to be doubling down as it appoints hardliner Mojtaba Khamenei, son of Ali Khamenei, as Iran’s new supreme leader.
