Mark Vitner

Unknown Unknowns in Narrower Water

The past week marked a decisive turn in the cycle. What began as a central-bank-dominated narrative has been overtaken by energy, geopolitics, and the reintroduction of constraints. The Federal Reserve may still set the policy rate, but it is no longer setting the tone. That role now belongs to geopolitics, where oil flows and shipping lanes are only part of the equation, and where markets are increasingly forced to price the harder-to-quantify variables, namely President Trump’s often opaque strategic calculus and the uncertain present and future leadership of Iran.

Three weeks into the Iran shock, markets have stopped reacting and started repricing. The distinction matters. Initial reactions tend to overshoot and reverse, particularly on Fridays and Mondays. Repricing embeds. Oil, the dollar, equity markets, and Treasury yields are no longer moving independently. They are moving as a system, and that system is signaling something unambiguous: the path forward for policy has narrowed.

“There are known knowns…there are known unknowns…but there are also unknown unknowns—the ones we don’t know we don’t know.” — Donald Rumsfield

This is increasingly a market defined by what Donald Rumsfeld once called the “unknown unknowns,” where the greatest risks are not the ones investors can model, but the ones they cannot yet fully see.

This is not a classic risk-off environment. It is something more nuanced and more challenging. Markets are not primarily pricing a collapse in growth. They are pricing a constraint on policy. Oil has risen enough to lift near-term inflation expectations, but not enough to immediately crush demand. Yields have moved higher, not lower. The dollar has firmed. Even gold has struggled to behave like a traditional haven, reflecting higher real rates rather than panic. Taken together, this is the signature of a stagflation scare in its early, more subtle phase. The first casualty is not growth, but flexibility, meaning the ability of policymakers to ease, of markets to rally on weaker data, and of households and businesses to absorb higher costs without cutting back somewhere.

The Federal Reserve finds itself in a familiar but unenviable position. It held rates steady at its March meeting and emphasized uncertainty tied to developments in the Middle East. The tone was more cautious than dovish or hawkish. Policymakers explicitly acknowledged the risk that higher oil prices could feed into inflation expectations, even as the labor market shows signs of softening beneath the surface. The result is a policy stance that is neither tightening nor easing but rather waiting for more information. In this instance, “Wait and see” is less of a placeholder and more of a strategy for now. The futures market does not see another cut until the middle of 2027.

History offers a useful frame for understanding the moment, and it is not a comfortable one. The current posture sits somewhere between Chamberlain’s “peace for our time” and Kennedy’s pledge to pay any price and bear any burden in defense of strategic interests. An early capitulation, or TACO moment, would carry series long-term negative implications for the security of the Middle East, Asia and U.S. homeland. The decision to pay any price and bear any burden comes down to U.S. taxpayers picking up the tab for stakes and burdens than impact much of the world and energy-dependent Europe in particular.

This puts the situation somewhere in the middle defined by caution but shadowed by the risk of escalation. Policymakers are attempting to avoid overreaction while recognizing that underreaction carries its own costs. There is also, still at the far edge of the distribution, the possibility of something closer to a Venezuela-style outcome, where the current conflict is redirected, under sustained external pressure, toward a negotiated equilibrium rather than further escalation. That framework aligns with President Trump’s stated objective of bringing Iran’s enriched uranium under control and establishing joint oversight of the Strait of Hormuz, a solution that would seek to convert military leverage into a new geopolitical arrangement.

For now, the energy shock is doing what energy shocks typically do. It is acting like a tax on the global economy. Higher gasoline and diesel prices are already eroding purchasing power, particularly for lower-income households, while also raising costs across transportation, logistics, and production. Airlines, railroads and trucking firms are already making hard choices to control cost. The more important development, however, is that the shock is broadening. This is no longer just about oil and diesel fuel. Fertilizer, liquefied natural gas, industrial gases, and shipping costs are all being drawn into disturbance. When supply shocks move beyond a single commodity and into the wider production network, they tend to persist longer and prove more difficult to unwind, particularly if fears of shortages and higher prices become embedded in decision-making.

The labor market, at least on the surface, continues to hold. Initial jobless claims remain low, and layoffs are contained. Yet the underlying dynamics are less reassuring. Hiring has slowed materially, and much of the apparent stability reflects a lack of firing and reduced voluntary turnover rather than resilient demand. This “no-hire, fewer-quits, no-fire” equilibrium is consistent with a productivity-driven expansion, where firms are producing more with fewer workers, supported by capital investment and technological gains. With turnover down by roughly one-third from its prior norm, businesses not only need to hire fewer workers but also spend less on training and onboarding, while benefiting from a more experienced workforce. This is an equilibrium that can shift quickly, however, if demand weakens further.

Housing offers a similar story. Earlier in the year, lower mortgage rates provided a modest lift, raising hopes that the sector might stabilize. That window now appears to be closing. Rising Treasury yields have pushed mortgage rates higher again, affordability remains stretched, and inventories are beginning to build. Housing does not need to lead the expansion, but it does need to find a floor. For now, higher rates are delaying that process. As a result, residential investment is likely to remain a modest drag on growth in the near term rather than the source of support seen in prior cycles.

Globally, the constraint is more pronounced. Europe remains particularly exposed due to its reliance on imported energy and a more fragile industrial base. Central banks are responding accordingly. The ECB has shifted in a more hawkish direction, the Bank of England is warning of renewed inflation pressures, and even in Japan the tone is beginning to change. The common thread is clear: higher energy prices are limiting the ability of central banks to support growth.

This tension between sustaining growth and preventing a supply shock from evolving into broader inflation is now the defining feature of the cycle. The broader framework we have outlined in recent months still holds. This remains a capital-led expansion, driven by infrastructure, reshoring, and artificial intelligence. Productivity gains are real and continue to support output, but they are unevenly distributed. Capital spending can remain firm, supported by long lead times and strategic investment decisions, even as consumer spending becomes more volatile. The result is a two-speed economy, where strength at the top coexists with increasing strain at the household level.

Looking Ahead

Looking ahead, the usual calendar of economic data matters, but it is no longer the primary driver. Productivity, consumer sentiment, and inflation expectations will provide important signals, but markets are taking their cues from a different set of variables. Oil prices, the dollar, long-term yields, equity market breadth, and inflation expectations measures now form the core dashboard. These are the indicators that will determine whether the current shock stabilizes, intensifies, or begins to fade.

The range of outcomes is relatively clear. A de-escalation in the Middle East would allow oil prices to stabilize, financial conditions to ease, and the Federal Reserve to regain some flexibility. A prolonged disruption would keep inflation elevated and growth below trend, forcing policymakers to remain cautious for longer. A further escalation, particularly one that damages energy infrastructure or meaningfully impairs shipping through the Strait of Hormuz for an extended period, would force difficult trade-offs for businesses and policymakers and further narrow the margin for error.

For all the disruption stemming from the Iran crisis, the expansion is still underway. The underlying structure remains intact. Jobless claims are low, capital investment is firm, and productivity gains continue to support output. But the environment has changed. The system is more sensitive, and the buffer provided by stable energy prices, easing inflation, and improving financial conditions has diminished.

The global economy is still moving forward. It is simply doing so in shallower water, with less room to maneuver, more complex trade-offs, and a policy cushion that is thinning by the week.

From Tail Risk to Market Reality

The war with Iran moved from tail risk to market fact pattern over the past ten days, and the economic conversation changed with it. What began as a geopolitical shock is now an inflation, funding, and confidence shock as well. Our thoughts remain first with those in harm’s way, especially U.S. personnel and allies operating in an increasingly fluid theater.

Markets are no longer pricing a modest disruption. They are pricing a serious supply shock with an uncertain self-life. Reuters reported Monday that crude briefly traded near $119.50 per barrel, Gulf producers have begun cutting output as shipments stall, and G7 governments are weighing emergency stock releases. Wall Street sold off early, the dollar strengthened, and bond markets repriced inflation risk faster than growth risk. Attitudes improved in the afternoon as President Trump signaled that the conflict is closer to an end than it appears.

The U.S. economy entered this episode in better shape than many feared. Friday’s February employment report was weaker on the surface but less alarming underneath. Nonfarm payrolls fell 92,000, the unemployment rate held at 4.4%, average hourly earnings rose 0.4% on the month and 3.8% from a year earlier, and participation held at 62.0%. Healthcare strike effects, federal cutbacks, and prior downward revisions made the headline softer, but the labor market still looks more cooled than cracked.

Hormuz: From Friction to Shock

The situation in the Strait of Hormuz increasingly resembles the central tension in the George Clooney film The Peacemaker: preventing a crisis before it becomes irreversible. As Clooney’s character notes, if you want to stop catastrophe, you cannot wait for the mushroom cloud. Markets are now grappling with that same question of timing and duration.

The Strait of Hormuz has moved well beyond a friction story. Ship traffic remains nearly paralyzed, hundreds of tankers are idle, and Saudi Arabia has begun diverting exports toward Red Sea routes. Iraq, Kuwait, Qatar, and the UAE have also curtailed output as storage fills and logistics snarl. Brent briefly touched $119.50 and WTI traded near similar levels. That is no longer low-to-mid-$80s disruption pricing. It is the market’s way of signaling that duration now matters as much as magnitude.

Prices stabilized near $90 per barrel late Monday afternoon after President Trump suggested the United States might move to secure the Strait of Hormuz, easing fears of a prolonged shipping shutdown.

The volatility reflects uncertainty more than a definitive loss of supply. The key distinction is between temporary seizure and structural destruction. Strategic petroleum reserves, spare production capacity, elevated inventories, and the flexibility of U.S. shale still provide a substantial cushion. But once physical flows are impaired and major producers begin cutting output, the path to normalization becomes longer and more uncertain.

Eighty-dollar oil signals volatility. One-hundred-twenty-dollar oil signals that markets are beginning to price regime change and the possibility of a longer disruption to global energy supply chains.

The psychological dimension should not be underestimated. Videos circulating over the weekend showing burning oil storage facilities outside Tehran carried an unmistakably apocalyptic tone. In the absence of hard information about how long shipping through the Strait of Hormuz might be disrupted, those images likely amplified investor anxiety and helped fuel the earlier spike in oil prices.

Labor Market: Softer Headline, Firmer Core

Friday’s employment report looked alarmingly weak at first glance, but the internals argue for moderation rather than collapse. Payrolls fell 92,000 in February after a downwardly revised 126,000 gain in January, with healthcare employment dragged down by strike activity and federal government payrolls continuing to trend lower. Revisions lowered December and January payrolls by a combined 69,000. Even so, the unemployment rate edged up only to 4.4%, participation held at 62.0%, average hourly earnings rose 0.4% on the month, and aggregate hours worked increased modestly.

One factor largely overlooked over the weekend is that January and February payroll data are often highly volatile due to swings in holiday-related hiring. In the past those swings were concentrated among retailers. Today they are more often found among restaurants, delivery services, and couriers. The return of winter weather also reversed earlier gains in construction payrolls that had benefited from relatively mild conditions in December and early January. Annual updates to the methodology BLS uses to compile the monthly data further complicates monthly comparisons and this year also has the added burden of government shutdowns and outsized reductions in the federal workforce.

As we cautioned last month, the January payroll numbers were ultimately not likely to be as strong as the headlines suggested. Even so, the three-month trend, which smooths many of these distortions, suggests hiring has slowed to a crawl. The ADP data point to a slightly firmer underlying trend, and we remain encouraged by the improvement in the employment diffusion index, which shows a broader array of industries adding jobs. That improvement is echoed in both the ISM Manufacturing and Services surveys, which have also shown gradual improvement in recent months. Given current conditions, we feel the best measure of underlying job growth is provided by measures of private sector growth from the BLS and ADP.

For the Federal Reserve, the result is an awkward combination: labor market conditions are soft enough to invite discussion of easing, but wage growth remains firm enough to complicate any response to an energy-driven inflation impulse. For now, the Fed likely has time to let the data clarify the underlying trend. Aggregate hours and productivity trends suggest real GDP is still expanding at roughly a 2.5% pace in the first quarter.

Europe: Energy Shock, Strategic Squeeze

Europe looks especially exposed. Qatar’s production halt has intensified competition for LNG cargoes, European benchmark gas prices jumped more than 30% after the attack on Qatar’s LNG facilities, and major gas storage levels across Europe are near 30% full versus roughly 54% typical for early March. Germany’s inventories are only about 27% full and the Netherlands is near 10%. Statkraft also warned that higher gas prices are already pushing up power costs in Germany, France, and the U.K.

That leaves Europe squeezed from both directions. It remains strategically dependent on the United States for security while once again confronting an imported energy shock that threatens industrial competitiveness. The old continent spent the better part of three years learning that energy dependence is destiny. Iran has now handed it a refresher course.

Markets: Inflation Repricing, Growth Questions Next

Financial markets are behaving as one would expect in the early stages of an oil shock. Wall Street fell Monday before paring losses, the dollar strengthened as a source of liquidity, and Treasury yields jumped and then partially retraced as investors debated whether higher energy prices mean tighter financial conditions or simply more inflation. Gold even fell on Monday as the stronger dollar and reduced expectations for near-term easing overwhelmed the usual haven bid.

ISM and Cyclicals: Still Expanding, Less Comfortable

The ISM surveys remain among the cleanest read-throughs on cyclical momentum, and they continue to point to expansion. Manufacturing has held above 50 for a second consecutive month, with new orders and backlogs improving from previously depressed levels. The Services survey has also remained comfortably in growth territory. That is the good news.

The less comforting news lies in costs. Tariffs, metals prices, AI-related equipment demand, and now energy are all pushing input costs higher at the same time. Firms can manage one cost shock. Several arriving simultaneously begin to squeeze margins, slow hiring, and delay discretionary spending. The industrial upswing remains intact, but it is now running into a much harsher cost backdrop.

Regular readers know we place substantial weight on manufacturing because it provides the cyclical impulse for the broader economy. The recent improvement in factory activity, defense production, aerospace output, data-center construction, and reshoring still argues for solid underlying growth later this year. The latest data show a clear improvement, with orders up sharply. The risk is that oil and LNG could do to 2026 what tariffs alone could not: turn what had been shaping up as a classic cyclical rebound story into a much messier inflation story.

Piedmont Perspective: Deterrence, Duration, and Europe’s Dilemma

Much of the public discussion still treats the current conflict as a sudden rupture. Strategically, it is better understood as a continuation of a long-running confrontation that prior administrations were often reluctant to fully acknowledge. Since 1979, Iran’s regime has defined the United States as its principal adversary and has pursued that objective through both direct actions and a network of regional proxies. For markets, the key issue is not rhetoric but duration. Temporary conflicts can be traded around. Prolonged wars reshape inflation psychology, investment timelines, supply chains, and alliance structures.

Israel has long been Iran’s second primary adversary. Tehran has waged a sustained campaign against the Jewish state through regional proxies, including Hamas, Hezbollah, elements of the Muslim Brotherhood network, and the Houthis, as well as through covert operations. Iran has provided funding, training, and strategic support to these groups, and U.S. and Israeli intelligence assessments indicate Iranian backing for the October 7 attacks on Israel. From Israel’s perspective, that attack fundamentally altered the strategic calculus, strengthening the case for dismantling the regional architecture that Iran has built under the leadership of Supreme Leader Ali Khamenei.

It is worth remembering that relations between Israel and Iran were not always hostile. Prior to the 1979 revolution, the Persian monarchy maintained quiet but meaningful ties with Israel. A resolution that ultimately replaces the current theocratic regime with a government willing to normalize relations with its neighbors would significantly alter the Middle East’s economic trajectory, opening the door to broader regional integration and growth.

Europe now finds itself in a familiar and uncomfortable position. It speaks with moral clarity but possesses limited hard power while remaining heavily exposed to global energy markets. A prolonged Middle East disruption would indirectly strengthen Russia through higher energy prices, complicate Europe’s support for Ukraine, and remind investors that the continent has yet to close the gap between its geopolitical ambitions and its strategic capabilities. History has a habit of sending the bill twice.

Looking Ahead

This week’s calendar arrives at an awkward moment. On Tuesday, investors will parse the New York Fed’s Survey of Consumer Expectations, the rescheduled January Existing Home Sales report, and the delayed fourth-quarter retail e-commerce release. Wednesday brings the February CPI report, the week’s key macro event. Thursday includes initial claims and the February PPI. Friday is crowded: the second estimate of fourth-quarter GDP, personal income and the PCE deflator, JOLTS, and the preliminary March University of Michigan consumer sentiment survey.

Under ordinary circumstances the CPI would dominate. This week it shares the stage with oil, gasoline, shipping disruptions, and consumer psychology. If inflation data run hot while gasoline prices keep climbing, markets will further reduce the odds of near-term Fed easing. If sentiment sours sharply, growth fears will move up the list.

Funding Fundamentals

Front-end relief can no longer be assumed. Oil in the $90 range, firmer wage growth, and a still-expanding services economy complicate the path to easier policy. Funding windows may remain open, but they are likely to be more episodic and more dependent on intraday market tone. Refresh liquidity forecasts, revisit commodity and transport exposures, and be realistic about working-capital pressure if energy and freight costs remain elevated. Opportunistic issuance on rallies still makes sense, but the comfort of a steadily declining rate path has faded.

Bottom Line

The U.S. economy entered the Iran shock with more resilience than the headlines suggest, but resilience is not immunity. As Clooney’s character observes in The Peacemaker, “Once it starts, you don’t control it.” Markets are hoping that deterrence still works before the current conflict reaches that stage. Friday’s employment report reiterates that the labor market has limited room for error, but it is not collapsing either.

Monday morning’s oil market initially signaled that the geopolitical shock was intensifying, before reconsidering that view by mid-afternoon. The oil market remains well supplied overall, but a prolonged disruption could easily see those earlier price highs revisited. Europe’s renewed energy vulnerability raises the global stakes, and this week’s inflation and activity data will help determine whether the macro backdrop can absorb another oil spike.

Economic growth remains solid, even if it is moderating somewhat. Real GDP appears to be tracking near a 2.4% annualized pace in the first quarter, reflecting the combined effects of winter weather and the early stages of geopolitical uncertainty weighing on consumer spending and capital investment.

Markets began the year expecting a friendlier mix of moderating inflation, modest policy easing, and steady growth. They are now being asked to contemplate something less comfortable: respectable growth, stubborn inflation, and a war whose duration may matter almost as much as its outcome.

A Blizzard of Economic Data Ahead of the Blizzard

Government statistical agencies are still diligently working to catch up on lost time from the shutdown, resulting in the latest data reflecting a mix of tail-end Q4 2025 and early Q1 2026 figures. While headline growth was softer than anticipated—partly due to the shutdown subtracting from activity—underlying final demand showed resilience. We estimate that the end of the shutdown will add a 1.3pp boost to Q1 2026 growth, pushing our tracking estimate to 3.4% annualized. Real final sales to domestic purchasers advanced solidly, climbing at a 2.4% annual rate. While that is a touch below its recent trend, it is strong enough to support a continued broadening in economic gains.

The shortfall in Q4 growth is not a warning about slower economic growth. Instead, it is evidence that growth faced temporary drags from the government shutdown. The underperformance will likely continue in Q1 due to losses tied to unusually harsh winter weather across much of the U.S. during February. Even with weather distortions, continued productivity gains from AI investment will provide a strong counterbalance to these distortions, and we expect strong Q1 GDP growth.

Consumer spending has shown resilience, supported by strong household balance sheets and wealth effects from asset markets. Spending has been bolstered by higher-income households, while broader outlays face pressure from lingering inflation and policy fog. Recent data, however, indicate narrowing breadth. Retail sales ended 2025 on a soft note, and weekly tracking data from the Chicago Fed point to a slight decline in retail sales in January. The Supreme Court’s February 20, 2026, ruling striking down IEEPA tariffs reduced the effective tariff rate from 12.7% to 8.3%, offering a modest boost, though offset by President Trump’s announcement of a new 10-15% global tariff under Sec. 122.

There has been a great deal of discussion recently on who bears the burden of tariffs. We continue to believe the burden has been shared between producers, shippers and wholesalers, retailers, and consumers. Inflation ran about 0.4 percentage points higher in 2025 than it would have otherwise. Nearly all of that showed up in higher prices for goods. The substitution effect has reduced the overall impact. Monetary policy has also remained tight. As a result, higher prices for imported have left consumers with less to spend on other goods and services, which has reduced inflation in these categories.

The bulk of tariff passthrough is now behind us, and we estimate it increased core PCE prices by about 0.7% through January, with a further 0.1% increase in the remainder of 2026. We expect the burden from tariffs to diminish this year and look for inflation to gradually decelerate back to the Fed’s 2% target by year-end.

Sentiment: Subdued and Uneven

Measures of consumer confidence have stabilized but remain historically low. The two most widely followed measures from the Conference Board and University of Michigan are roughly 15-20% below their year-ago levels amid slower job growth, reflecting the lingering effects of prior inflation, slower job growth, and ongoing geopolitical tensions. Recent improvements reflect the waning impact of tariffs and diminished inflation overall, particularly in gasoline prices and grocery prices other than beef products.

Business Activity: Green Shoots?

Recent PMI readings and industrial production data show the factory sector improving. The ISM Manufacturing index rose to its highest level since 2022 in January, while manufacturing payrolls posted their first increase in 14 months and gains were broad-based, with the diffusion index for manufacturing employment rising back above the key 50 level. The diffusion index, like the ISM Manufacturing survey, is a measure of the breadth of the strength in the factory sector. A reading above 50 means more industries are expanding and adding to their payrolls than are contracting or reducing staffing.

Consumer and Housing: Weather, Not Weakness

Consumer spending softened at the start of the year, but the weakness appears more short-term oriented. Overall retail sales were flat in December and core retail sales fell 0.1%. Even after the cooldown, holiday retail sales turned in a solid performance, rising 3.7%. December’s drop reflects payback effects from earlier strength and harsh winter weather weighing on activity. Final demand remains supported by steady employment and easing inflation, limiting downside.

This looks like weather distortion and seasonal payback, not a demand pullback.

Housing activity also started 2026 on a weak note. Existing home sales fell 8.4 percent in January to a 3.91 million annual pace, well below expectations, with prior months revised lower. Harsh winter weather likely contributed to the decline, and tight inventories compounded the slowdown. For-sale supply slipped again in January and remains constrained, though inventory typically improves heading into spring.

Median home prices fell 2 percent and are up just 0.9 percent over the past year. As mortgage rates ease and labor markets stabilize, sales should gradually climb back. We are looking for a solid spring selling season and look for housing to add to economic growth in the second half of 2026.

The advance PMIs for February released this past week fell back slightly, possibly impacted by the harsh winter weather, but remain in expansion territory. Both the manufacturing and services indices dipped slightly during the month, but both remained above the key 50 break-even level that signals growth in the factory sector.

Core factory orders also remain solid, although the headline data continues to be battered around from month-to-month by swings in orders for commercial aircraft. Shipments were up solidly in December, which means the factory sector likely entered this year with solid momentum.

The apparent improvement in the factory sector is a green shoot worth watching. We have been expecting to see a rebound in the most cyclical parts of the economy, which were hit hard by tariff uncertainty and inflation fatigue among consumers. We expect that rebound to become apparent later this spring or early this summer. The January data suggest the rebound might come even earlier.

Blizzard Navigation: Interpretation

Three themes emerge from the data:

1. Momentum Is Moderating, Not Collapsing. Household consumption is positive but facing tariff-related headwinds. Despite the slowdown in headline GDP growth, the economy is still growing solidly. Final Sales to Domestic Purchasers rose at a 2.4% pace in Q4 and rose 2.7% Yr/Yr in Q4. For 2026, real GDP is likely to rise 3.3% Q4/Q4, thanks to the lower comp, while Final Sales to Domestic Purchasers rises at the same 2.7% pace it did this past year.
2. Income and Wealth Divergence Matter. Spending strength is concentrated among wealthier households, while middle- and lower-income segments continue to exhibit caution. This pattern has implications for durable goods, housing, and discretionary services, especially with AI-driven productivity offsetting some labor pressures.
3. Policymakers Are Flying Through Fog. With core inflation still above target and growth stabilizing, the Fed faces a delicate balance: ease too soon and risk reaccelerating prices amid tariff volatility; wait too long and risk tightening into a slowdown. FOMC minutes from January highlight hawkish tones, with some members open to hikes if inflation persists. We believe such talk is simply the Fed’s Open Mouth Policy intended to reassure the bond market.

Businesses, investors and consumers are behaving like drivers in heavy snow. They have slowed down, are proceeding more cautiously, and remain overly responsive to short-term visibility changes rather than structural conditions.

The Piedmont Perspective

Strategic Pressure: Why Weakness on One Front Would Likely Snowball Across All Fronts

The economy today is not just an aggregation of GDP figures and spending patterns. It is tightly connected to the strategic pressures facing U.S. policymakers—and investors are pricing that in. The Trump Administration’s emphasis on tariffs and trade deals blends seamlessly into geopolitics, often touted as a tool for ending conflicts or pressuring adversaries toward negotiations. This heightened role of trade and tariffs is critical to understanding the current long list of global hot spots, where economic leverage intersects with security concerns.

President Trump’s emphasis on tariffs and trade deals blends seamlessly into geopolitics.

Across multiple theaters—Venezuela, Iran, Taiwan, Russia/Ukraine, Israel-Hamas-Hezbollah, and most recently Mexico’s drug cartel crisis—the U.S. faces simultaneous stress tests. Each region bears its own risks, but they are interrelated in ways that amplify economic uncertainty.

• Venezuela’s Output and Oil Dynamics. Persistent instability keeps global oil markets on edge. The recent departure of Cuban advisors from Venezuela marks a potential shift, reducing some foreign influence and creating an opening for U.S. engagement. This has been framed as a “stand tall” moment in broader negotiations with China, which has significant investments in Venezuelan oil. The current Venezuelan regime is working closely with the Administration, which could aid supply normalization. The seizure of sanctioned tankers is also helping ease supply concerns at the margin.
• Iran and the Gulf. Escalating tensions, including Iran’s military drills restricting parts of the Strait of Hormuz, elevate risk premia. Disruptions in the Strait or Red Sea corridors ripple through global supply chains and commodity markets—impacting prices, production costs, and confidence. Brent prices rose 6% last week amid these tensions, though we expect easing once de-escalation occurs. Negotiations remain fraught, with tariffs positioned as leverage to curb Iran’s nuclear ambitions and regional influence.
• Taiwan and the Tech Supply Chain. Taiwan remains the central node in global semiconductor production, particularly in advanced logic chips critical to AI infrastructure, cloud computing, and next-generation defense systems. Any escalation in cross-Strait tensions would represent more than a geopolitical flashpoint; it would constitute a direct supply-side shock to the capital investment cycle that has underpinned recent productivity gains.

The current AI build-out is capital-intensive and hardware-dependent. A disruption to Taiwanese semiconductor output would slow equipment investment, compress earnings expectations across the technology complex, and raise global risk premia. Financing conditions would tighten not because of monetary policy alone, but because uncertainty would lift required returns on capital.

Trade agreements and semiconductor partnerships serve a dual function: economic integration and strategic deterrence. The deeper the cross-border commercial ties, the higher the cost of escalation.

Reports that Beijing is pressing Washington to delay or dilute an agreed arms package to Taiwan—using the prospect of postponing high-level meetings as leverage—introduce an additional layer of uncertainty. Markets will focus less on the diplomacy itself and more on the signal. A perceived weakening of deterrence would likely raise volatility across technology equities, defense names, and Asia-linked assets. Reinforcement would signal policy consistency and reduce tail risk.

From a macro perspective, Taiwan is not a peripheral issue. Stability in the Taiwan Strait underpins a substantial portion of global capital formation, productivity growth, and equity market valuation. Credibility in that theater carries economic consequences within and well beyond the region.

• Russia/Ukraine and Energy/Defense Markets. The prolonged conflict keeps energy markets and defense spending elevated. Escalation or stalled diplomacy maintains high risk premia, diverts capital toward safe assets, and compresses risk-asset valuations. Wheat prices have tracked higher due to geopolitical risk premiums from this flashpoint. Tariffs on Russian goods amplify economic isolation as a strategy to weaken resolve.
• Israel-Hamas-Hezbollah Centrifuge. The Middle East remains a powder keg. An expanded conflict could shock oil markets, complicate U.S. force deployments and alliances, and reinforce economic caution in corporate boardrooms globally.

The risk here mirror those with Taiwan/China. The buildup of U.S. forces in the region suggests a major intervention is likely soon. Iran will likely respond violently as the regime’s survival would be at stake. Iran would likely strike oil facilities in the Arabian Gulf, which would send oil prices higher but not threaten energy supplies in the U.S., which is amply supplied. Ultimately, we expect the Iranian region to be toppled this year. Anything less than that would make a Chinese move against Taiwan more likely.

• Mexico, Cartels, and Border Economics. Security instability along the southern border affects labor markets, supply chains, and cross-border commerce. Firms factor these into investment decisions and logistics costs, exacerbated by recent tariff changes on Mexico. The situation has intensified following the killing of a powerful drug lord by the Mexican military. The cartel has responded violently, but mostly by destroying property and overrunning airports in tourism-centric parts of Mexico.

Taken together, weakness on any one of these fronts would cascade:

• Commodity Price Shock → Feed inflation → Fed policy tightening or delayed easing
• Supply Chain Shock → Raise costs → Consumer price pressures → Consumer spending slows
• Risk Premia Shock → Raise discount rates → Lower asset valuations → Lower wealth effects
• Corporate Caution → Delay hiring & capex → Softening growth cycle
• The U.S. opts for Expediency: Effectively Showing Weakness → Emboldening China on Taiwan and Russia with Ukraine → Further Increasing Global Geopolitical Instability → Raising risk premia

In chess, a weakness on one flank invites attack across the board. In macro-geopolitics, a breakdown in any of these theaters tightens financing conditions, weakens confidence, and slows growth globally.

Today’s market blizzard isn’t snowflakes—it is the accumulation of strategic pressures with cross-linked knock-on effects, now compounded by the Supreme Court tariff ruling and policy responses.

Looking Ahead: The Week in Data and Policy

This week’s economic calendar features several key data releases that could provide further insights into the trajectory of growth, inflation, and labor market stability. On Monday, factory orders for December are expected to show a modest decline, reflecting ongoing manufacturing softness amid trade uncertainties. Tuesday brings housing market indicators with the S&P Cotality and FHFA home price indices for December, anticipated to post small gains, alongside Conference Board consumer confidence for February, which may edge higher following last month’s plunge. Thursday’s initial jobless claims will offer a timely read on labor market health, while Friday’s PPI report for January, which is projected to rise 0.3%, will be closely watched for signs of persistent price pressures, especially in core measures excluding food and energy. Construction spending data for December and November revisions round out the week, which should show weakening residential building and some stability in nonresidential construction.

Fed speakers will dominate the policy landscape, with multiple officials providing updates on monetary policy amid the tariff reset and geopolitical fog. Governor Waller speaks twice on Monday and Tuesday, likely reiterating his view that rates should move closer to neutral given inflation nearing target ex-tariffs. Other notable appearances include Governors Cook and Bowman, as well as regional presidents like Goolsbee, Collins, Bostic, Barkin, Schmid, and Musalem, many emphasizing caution on inflation risks despite labor market weakness. Adding to the week’s significance, President Trump delivers the State of the Union Address on Tuesday evening at 9 p.m. ET, where he is expected to outline priorities on the economy, trade deals, tariffs as a geopolitical tool, and ongoing conflicts, potentially influencing market sentiment and policy expectations.

Final Thought

Economic data from last week confirms a key theme: visibility has become a greater concern than slower growth. Growth is stabilizing, sentiment remains subdued, and consumer strength is uneven—making for tough sledding ahead—while strategic risks from oil to semiconductors to geopolitical flashpoints add layers of complexity that markets are pricing defensively.