Stocks are lower as we await the deadline for Iran to open the Strait of Hormuz. Bonds and MBS are down.
Iran has rejected a proposal to delay strikes for 45 days in exchange for re-opening the Strait. The deadline is set for 8:00 pm EST and Trump is threatening Iran’s infrastructure: “The entire country can be taken out in one night, and that night might be tomorrow night,” he said during a news conference on Monday.
The two sides are talking though. Trump rejected an Iranian counter-proposal with “They’ve made a proposal, and it’s a significant proposal…it’s not good enough, but it’s a significant step,”
The situation in Iran is ironically affecting oil prices more in the US than overseas. Typically US domestic oil (West Texas Intermediate) trades at a discount to North Sea Brent, the global benchmark. Since a lot of oil is trapped in the Gulf, demand for WTI is high enough to have it trade at a $5 premium to Brent.
The jump in oil prices is expected to cause a huge jump in the inflation numbers set for Friday. The forecast for the annualized March CPI is to increase from 2.4% in Feb to 3.4% in March. The core rate is expected to rise from 2.5% to 2.7%.
The services economy continued to expand, according to the ISM Services Index. The index declined from 56.1 to 54, which is still a strong reading. New orders increased while business activity declined. Employment declined, while prices increased.
“March’s Services PMI® features the third month in a row with an increase in the 12-month PMI® average, up 0.6 percentage point from 51.7 percent in December 2025 to 52.3 percent. However, six of the 10 subindexes decreased month-over-month. The Prices Index increased, as expected, amid higher oil and fuel costs, and the Supplier Deliveries Index indicated slower performance compared to February, also unsurprisingly with shipping issues and flight disruptions due to the Middle East conflict and winter weather. Continuing strength in business activity, new orders and backlog of orders are positive economic signals, so the Employment Index dropping to its lowest level since December 2023 (43.5 percent) was a surprise.
“There are other signs of economic strength. Exports and imports activity have expanded for two months in a row for the first time since September and October 2024. The predominant commentary this month was about impacts and adjustments due to the conflict with Iran and the expected flow through of higher oil prices at some point. Companies across many industries reported seeing higher gas and diesel pricing, and inventories of multiple goods increased to withstand supply chain disruptions or short-term oil price impacts. Such construction products as lumber, copper and steel were noted as up in price. Although tariff impacts were still noted by panelists, Iran-related impacts dominated the comments in March.”
A tailwind for business overall is the end of tariffs. Trump extended them after SCOTUS declared them unconstitutional, but that extension only lasts 150 days, which means things revert back to normal in late June. Respondents reported that we are already seeing adjustments to this.
The decline in employment is surprising given than BLS reported an increase in payrolls during March and most of the gain was in the services sector.
The Spring Selling season is off to a good start despite the increase in rates according to the ICE Mortgage Monitor. “Mortgage rates bottomed near 5.95% early this year, pushing affordability to its best levels in four years and helping drive two of the firmest monthly home price gains we’ve seen in over a year,” said Andy Walden, head of mortgage and housing market research at ICE. “Since then, 30‑year rates have risen roughly 40 basis points, pulling about four percent of buying power back out of the market and reshaping conditions from those early‑year peaks. Even so, 99 out of 100 major markets still saw improved affordability from a year ago, and inventory continues to rebuild. That combination is helping this spring market feel better supplied and more balanced than in recent years, even as rate volatility reasserts itself.”
The increase in rates has taken back some of the improvements in affordability and reduced refinance incentives. That said, home price appreciation is stalling out, incomes are still rising, and we should see rates return to normal once the Iran situation is sorted out. Inventory is increasing, albeit still below pre-pandemic levels.
