What you're not hearing about what markets are predicting for the Iran crisis

The war in Iran has been going on for three weeks, with no discernible end in sight. Long-dated Brent crude oil futures markets show a rapid restoration of normal pricing – much as they did, correctly, in an even greater war-driven oil spike in 2022. Markets are not always correct – indeed, the futures curve did not foresee the current crisis at all, when we were calling for oil to rise from $60 to $80. But in crises, when objective information is utterly lacking, markets are the best guess. Equity markets, forward estimates, long-term yields and TIPS spreads are not pointing to a prolonged crisis, recession or inflation. We are going to assume for now that these markets are right. Fed funds futures are priced to eliminate all rate cuts this year, and to expect some probability of a hike. Hiking into a supply-shock is a rookie error, which Powell twice disavowed at last week’s FOMC. We are going to assume this market is wrong. Our original call for three rate cuts this year is likely out of reach, but even that is more probable than a hike.