Better Iran news supports our house view
By far the biggest news this week was the Friday announcement of the reopening of the Straits of Hormuz to commercial traffic. It would be unwise to take this as the end of uncertainty, and we do not. Nevertheless, the cumulative retreat in global oil prices since the peak about 10 days ago is already meaningful enough to take us into territory we could consider manageable if indefinitely sustained (WTI prices in the $85 range).
Even if no further reductions occur and prices stabilize here, we would consider this consistent with our house view of an inflation hit that is largely contained to headline measures and limited broader spillover.
One key argument supporting that view—independent of oil prices—is our sense that pricing power today is dramatically weaker than it was back in 2022 during the major inflation spike. Real disposable personal income grew just 1.1% YoY in February; given the March inflation jump, whatever boost from tax refunds will likely be wiped away.
Consumer sentiment has plunged—even as the unemployment rate holds at a seemingly unproblematic level. We link this to weak hiring, which is a significant challenge to accelerating consumer spending.
Housing activity reflects consumers’ gloomy mood. At 3.98 million (saar), March existing home sales were the lowest level reported for any March since 2009—a sobering comparison indeed. Homebuilder sentiment dipped further in April to the lowest April reading since 2012 (save for a very brief blip in April 2020).
The consumer is worried about poor employment prospects and poor affordability. The room to push through broad price increases is small in our view, and this should help contain the broader inflationary impact of Middle East hostilities.
Market pricing has shifted once again in favor of a cut late this year (63% for December); we retain our recently adjusted call for two rate cuts (September and December).
