Monthly Economic and Market Summary

• Inflation cooled in January-Inflation, as measured by the Consumer Price Index (CPI), cooled more than expected in January, with annual price growth easing to 2.4%, as lower gas and used-car prices provided relief. Still, tariff sensitive goods and services rose at the fastest monthly pace in a year, underscoring sticky underlying pressures and likely keeping the Fed on hold at its next meeting

• Payrolls better than expected-In January, the U.S. jobs market began the year on solid footing, adding 130,000 jobs, well above consensus estimates of 70,000, according to the Bureau of Labor Statistics. Much of the strength continues to come from healthcare and social assistance, which together, added more than 750,000 jobs over the past year. Outside of those sectors, hiring remains subdued, with manufacturing down year-over-year and white-collar industries facing ongoing pressure, while slower immigration has also kept the unemployment rate relatively low at 4.3%.

• Mortgage rates decline-Mortgage rates dipped below 6% in February for the first time since 2022, potentially drawing more buyers and refinancing activity ahead of the spring selling season. The decline, driven by cooling inflation and prior Fed rate cuts, offers relief to a housing market stuck in a multi-year slump, though sales and applications remain soft amid high prices and job concerns.

• Consumers feeling more confident-Consumer confidence edged up in February, with The Conference Board’s index rising to 91.2 from 89 and topping expectations, though still below late 2024 levels. Expectations improved, but views on current conditions softened, with ongoing concerns around inflation, trade and politics; labor-market perceptions remained broadly stable in a low-hire, low-fire environment.

• Manufacturing expands again-U.S. manufacturing expanded for a second straight month, with the ISM PMI rising to 52.4, above 51.8 consensus and firmly in growth territory. Gains in new orders and production drove the increase, while backlogs climbed to their highest level since May 2022, signaling improving demand momentum.

Middle East conflict and market impact

On February 28, U.S. and Israeli forces initiated a major military campaign in Iran, prompting missile and drone retaliation across the region. While Iranian counterstrikes have largely avoided major upstream oil production facilities, export infrastructure and shipping channels have been severely disrupted. Traffic through the Strait of Hormuz—a conduit for roughly one-fifth of global crude supply—has stalled amid security concerns and surging insurance costs and it is unlikely that meaningful volumes of Iranian crude are leaving the country in the near term. Oil prices have increased to the $75–$80 per barrel range. Natural gas prices have edged higher in the U.S. and surged sharply in Europe and Asia, where Liquified Natural Gas (LNG) disruptions and tighter shipping insurance conditions have amplified supply concerns.

Markets responded with U.S. equities experiencing notable swings, while interest rates have shifted meaningfully higher, with yields beyond one year rising approximately 15 basis points. Unlike many geopolitical episodes that drive a flight to safety and lower yields, the dominant force in this instance has been the rise in energy prices and the associated impact on inflation expectations. Markets have pushed out the timing of the next potential Federal Reserve rate cut to at least September and potentially into 2027.

At present, the shock resembles an inflationary supply disruption rather than a demand-driven recession event. The duration and scope of any interruption to energy flows will be critical in determining the macroeconomic consequences. Over the long term, earnings growth is the engine of stock appreciation, while shifts in future earnings expectations often drive shorter-term market movements.

Historically, geopolitical events have rarely produced lasting equity market dislocations unless they materially impair economic fundamentals and earnings trajectories. As illustrated in the chart below, while geopolitical conflicts often trigger short-term market volatility, equity markets typically stabilize when earnings expectations remain intact.