IMPORTANT DISCLOSURE
This report is published for educational and informational purposes only. It does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. All positioning commentary reflects historical patterns and educational analysis, not personal recommendations. Past performance does not guarantee future results.
The Macro Landscape
The economy is currently in an unfavorable position: stagflation. Our probability model assigns a 30% likelihood to stagflation, with Tightening Stress close behind at 26%. This narrow margin means a single strong data release could shift the outlook. The core issue remains: inflation is elevated, growth is weakening, and the Fed is constrained between the two.
The source is no mystery. The StraThe cause is clear. The Strait of Hormuz has been largely blocked since the U.S.-Israel air campaign against Iran began on February 28. Six weeks later, production shut-ins average 7.5 million barrels per day, with the EIA projecting a peak of 9.1 million b/d this month. Brent crude averaged $103 in March and is expected to reach $115 in Q2 before easing. March CPI rose 3.3% year-over-year, the highest in nearly two years, with gasoline prices up a record 21.2% in one month, accounting for nearly three-quarters of the total increase. Commodities CPI remains high, and core services inflation (excluding shelter) is persistent. On the growth side, the Atlanta Fed's GDPNow is at 1.3% annualized, just above stall speed. Jobless claims are rising, and our tracked growth indicators are negative across labor, manufacturing, and consumer spending. Some housing data is outdated, but the overall trend is clear. diagnosis. Energy has ripped 37% this quarter. Utilities are up 7.5%. Meanwhile, Consumer Discretionary is down 9.3%, Financials are down 8.9%, and Health Care has dropped 6.4%. That pattern is textbook stagflation: inflation beneficiaries and defensives leading while rate-sensitive and growth-dependent sectors get hammered. The market is telling you the same story as the data.
Thesis Tracker
The Fed's implicit soft landing thesis is not supported by current data. Our benchmark indicates the soft landing scenario is failing on most measures, with 19 data points weakening the narrative and only 18 supporting it. The conclusion: the thesis is no longer viable.
At the March 18 press conference, Powell stated he would "reserve the term stagflation for a much more serious set of circumstances," noting that the 1970s stagflation involved double-digit unemployment. However, he acknowledged that "the risks to the labor market are to the downside, which would call for lower rates, and the risks to inflation are to the upside, which would call for higher rates." This situation represents a policy trap. The Fed kept rates at 3.5-3.75%, and the dot plot indicates one cut this year and another in 2027, but the timing remains uncertain as inflation and growth signals diverge.
This is why the "trapped" label is more significant than any single data point. If growth weakens further, the Fed may be compelled to cut rates despite elevated inflation. This scenario undermines credibility and has historically led to sharp market disruptions. Confidence in the stagflation outlook increased this week as March CPI reached 3.3%, the highest in nearly two years, while growth continued to slow.
What Changed This Week
Inflation accelerated across all measures, with headline CPI, energy CPI, commodities CPI, and core services excluding shelter reaching high levels. The cause is clear: the Strait of Hormuz closure is driving up energy prices, which in turn increases commodity and headline inflation. This is a classic supply shock. Higher energy and commodity prices function as a tax on consumers and reduce producer margins, impacting the real economy immediately. While the Fed typically overlooks supply shocks, this situation is complicated by Iran reportedly demanding a $2 million toll per tanker or an additional dollar per barrel for passage, establishing a price floor for oil even if ceasefire talks progress. Although considered transitory, resolution is likely months away, possibly extending into Q3 or Q4 before oil prices return to pre-closure levels. This is an optimistic scenario.
The Treasury General Account (TGA) declined sharply, reaching extremely low levels. As the Treasury spends down its cash buffer, liquidity is injected into the financial system, increasing reserves and easing funding conditions. This helps explain why funding markets, such as SOFR and commercial paper spreads, remain stable despite broader macroeconomic stress. The financial system's underlying mechanisms remain functional.
Markets rallied on ceasefire hopes, but these were short-lived. On April 8, a temporary U.S.-Iran ceasefire, brokered through Pakistan, led to the largest single-day relief rally since last year: the Dow rose 1,325 points (+2.85%), the S&P 500 gained 2.51%, the Nasdaq increased 3.5%, and WTI crude fell about 15% to $96, its largest single-day drop since April 2020. Airlines surged, while energy majors declined. The rally continued on April 9 as Israel agreed to direct talks with Lebanon, resulting in the longest equity winning streak since October. However, on April 12, JD Vance confirmed the failure of U.S.-Iran negotiations. The ceasefire catalyst has disappeared, and the market remains near highs without a supporting thesis, while underlying data—persistent inflation, slowing growth, and a constrained Fed—remains unchanged. Net insider buying has increased, but institutional positioning data from 13F filings is outdated and should not be heavily weighted for current analysis.
Early Warnings
Earnings resilience is the bullish risk the bears need to respect. [WATCH] S&P 500 earnings are growing over 11% year-over-year with sequential acceleration quarter-over-quarter. Credit markets agree: high-yield spreads remain historically tight at around 290 basis points, showing no stress. Yet the system is flagging nine growth-negative signals in a stagflationary regime. This disconnect matters. Macro data (surveys, leading indicators) can signal weakness months before it shows up in actual earnings. But it can also produce false alarms. If companies keep beating while macro data softens, the data may be lagging a resilient economy rather than leading a downturn. The key tell is forward guidance: if next quarter's earnings estimates hold or improve, the bearish macro read may be wrong. If guidance starts cutting while backward-looking beats continue, the data is winning. |
Valuation signals are flashing, but check the dates. [WATCH] The equity risk premium is negative: the S&P 500 earnings yield (roughly 4.0%) sits below the 10-year Treasury yield (4.29%). That means risk-free government bonds are paying more than risky equities, something we have not seen sustained since the dot-com era. The Buffett Indicator (total market cap to GDP) reads above 200%, well above historical norms. However, both of these metrics rely on quarterly data that is now 100+ days old. The recent market decline over the past several weeks may have already partially corrected the ERP compression. These are still worth watching, but the signal may be less acute than the raw numbers suggest. |
Credit quality rotation is underway, quietly. [WATCH] High-yield spreads remain tight on the surface, but the HYG/LQD ratio (junk bonds versus investment-grade) is falling. That isolates pure credit quality risk from rate sensitivity. The divergence between tight headline spreads and deteriorating relative credit quality is the kind of early warning that tends to resolve in one direction: wider spreads. This bears watching over the next several weeks, particularly if the Strait situation keeps energy costs elevated and margin pressure builds on lower-quality borrowers. |
The Week Ahead
Tuesday's March PPI report is the first test, and the setup is ugly. February PPI already came in hot at +0.7% month-over-month and 3.4% year-over-year, with the intermediate pipeline (processed goods for intermediate demand) running at +4.0% annually, the hottest since December 2022. That pipeline number tells you where prices are headed, not where they are. If March PPI shows further acceleration on top of that, the inflation story hardens: wholesale prices are feeding through to consumer prices with a one-to-two-month lag, and the Hormuz-driven energy shock is compounding the pressure from below.
A new Beige Book will be released Wednesday. The previous edition was positive, but underlying data has weakened. If the latest Beige Book acknowledges the growth deterioration indicated by nine separate indicators, it would represent a significant shift in the Fed's anecdotal assessment. Pay close attention to commentary on hiring intentions and pricing power.
Thursday's industrial production report will indicate whether the manufacturing recession is worsening. The previous reading showed a year-over-year contraction, and another negative result would add to the nine existing growth-negative signals. Initial jobless claims, also released Thursday, are trending higher at 219,000. While not yet concerning, jobless claims are an early indicator of labor market weakness. If claims approach and remain near 250,000, recession risk increases significantly.
The key event window is April 30, when GDP, PCE, and personal income data are released simultaneously. This week could clarify the current economic tension: if GDP is weak and PCE inflation remains high, the stagflation classification is reinforced. If GDP exceeds expectations and PCE moderates, the outlook may shift toward Tightening Stress or Reflation. The FOMC decision follows on May 6.
The Bottom Line
We are now three weeks into a period classified as late-stage stagflation. Historically, this phase prompts a policy response: the Fed pivots, inflation subsides, or growth contracts sharply. These outcomes are often abrupt.
The central issue is clear but challenging: inflation remains too high for the Fed to cut rates, while growth is too weak for the Fed to maintain its current stance. The market rallied on ceasefire hopes that have since faded, and now remains near highs without a clear catalyst.
We do not need to guess whether this inflation is supply-driven or demand-driven. We know. The Strait of Hormuz is closed. Iran's parliamentary committee approved the "Strait of Hormuz Management Plan" on March 30, formalizing a toll system: roughly $1 per barrel of crude cargo, payable in yuan or cryptocurrency, with a five-tier nationality ranking that denies transit entirely to U.S.- and Israel-linked vessels. A fully loaded VLCC pays approximately $2 million per transit. The White House has said the ceasefire depends on the Strait reopening "without limitation, including tolls," but Vance just confirmed those talks failed. Goldman Sachs warned this week that if the closure extends another month, Brent would stay above $100 for all of 2026, with a severe scenario pushing Brent to $120 in Q3 and $115 in Q4. Rabobank sees Brent averaging $107 in Q2, easing to $96 in Q3 and $90 in Q4, and that is the optimistic path assuming flows gradually resume. The floor under oil prices is structural now, not speculative. The Fed can "look through" supply shocks in theory, but when the shock lasts six-plus months, it starts feeding into expectations, transportation costs, food prices, and eventually wages. Transitory can become structural if it lasts long enough.
The next consideration is whether corporate earnings can continue to withstand current pressures. To date, companies are reporting double-digit growth despite weakening macroeconomic surveys. If this trend continues, concerns about stagflation may be overstated. However, if earnings guidance weakens, the data will have proven accurate, and the market will have been premature.
April 30 marks the next inflection point, with GDP and PCE data released simultaneously. These results will either confirm or challenge the classification as stagflation. The FOMC meets six days later. Until then, conditions remain challenging, the margin of safety is limited, and the Fed faces only difficult choices.
This report is published by Benjamin Capital Research for educational and informational purposes only. It does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. All positioning commentary reflects historical patterns and educational analysis, not personal recommendations. Past performance does not guarantee future results. Always consult a qualified financial advisor before making investment decisions.