Market Update - Pain at the Pump

Communicating price directionality has been distilled down to an almost binary composition: oil goes up, rates go up. Oil goes down, rates go down. Thankfully, the volatility of what was initially an unforeseen inflationary variable has begun to subside. That’s not to say oil has moved lower, rather the erratic knee jerk price action has faded. What this suggests is that the market is starting to capitulate to the notion that the war in Iran likely won’t be short lived. And with the Fed meeting tomorrow, we’ll now get to hear how Powell communicates the nature of the inflationary impact as it may be perceived over the longer term.

Now, as I just finished saying oil up and rates up, the reason I think we’ve been rallying recently in the face of still elevated oil prices is likely due to the demand destruction that accompanies higher prices at the pump. With evidence of a strained pocketbook driving consumer debt higher, the propensity to absorb cost increases on goods and services has diminished. Eventually, there is likely to be a behavioral impact on spending, which would be deflationary in nature. Unlike Liberation Day, where tariffs were largely absorbed or offloaded externally, gas prices are a 1 to 1 pass through directly to consumer budgets. There’s also an indirect flows impact across travel, transportation, utilities, ecommerce, and the list goes on, much of which falls into discretionary spending. So while oil and inflation tend to go hand in hand, I believe there is a ceiling where the opposite impact could occur, given the economic components described above.

Today, we’ve repriced to only one cut in 2026. That’s a meaningful shift from the three cuts we were forecasting just a month ago. What the market is looking for now is clarity on forward guidance, and given the uncertainty around how long the war will persist and the broader impact it has on the economy, the messaging is likely to carry a hawkish bent to preserve flexibility in Fed policy. This is especially true given the historical track record of oil’s impact on the consumer. The wildcard word of the day is “stagflation.” If that topic gets raised, the delicate dance Powell will need to navigate becomes: What happens if the employment landscape shows further signs of weakening? Let’s hope Powell brings his dance shoes, because a misstep, or even the wrong word choice, could throw gas (pun intended) on the fire.