The Top Line
Yesterday, stocks surged more than 2.5% after the U.S. and Iran agreed to a two-week ceasefire, sending oil prices into freefall. The relief is real — but the ceasefire is fragile, and a big inflation report lands this morning that could move markets all over again.
We are operating in a transitional regime defined by two overlapping shocks with distinct timelines. Q4 2025 GDP decelerated sharply to 1.4% annualized—down from Q3's 4.4%—driven by declines in government spending and exports, reflecting the drag from the October–November 2025 government shutdown before the Iran conflict began. Layered on top of that preexisting deceleration, the five-week U.S.-Iran war and effective closure of the Strait of Hormuz added a separate energy supply shock to the Q1 2026 outlook—and Wednesday's ceasefire announcement collapsed WTI crude 13–16% in a single session, reviving rate-cut bets that had been systematically priced out since early March. The structural tensions remain unresolved: core PCE held at 3.1% YoY through January, ISM services prices-paid hit a 42-month high in March, more than 800 container ships remain stranded in the Gulf, and Iran's parliament declared the ceasefire violated within hours of the deal. Markets are pricing a clean resolution; the data does not yet support that conclusion.
Inflation
Inflation — the pace at which prices rise — has been one of the Federal Reserve's biggest headaches in 2026. The Fed's preferred measure (called core PCE, which tracks what Americans actually spend money on, excluding food and energy) was running at 3.1% annually as of January — well above the Fed's 2% target. The stickiest part is services: things like rent, healthcare, and insurance keep rising even as gas prices have swung around. This morning at 6:30 AM MT, the government releases February's inflation reading — and it matters because if prices are still rising too fast, the Fed will keep borrowing costs (think: mortgage rates, car loans, credit cards) right where they are.
Key Takeaway
Inflation is still too high for the Fed to cut rates — and this morning's report will tell us whether that's getting better or worse.
The Federal Reserve's preferred inflation metric last printed core PCE at 3.1% year-over-year in January 2026—a reacceleration to a two-year high that predates the Iran conflict entirely. This deterioration is structural rather than energy-driven: ISM services prices-paid surged to 70.7 in March, its highest since October 2022, while ISM manufacturing prices-paid also moved sharply higher, reflecting what businesses are actually paying for inputs, wages, and services. February CPI printed at 0.3% MoM and 2.4% YoY on headline, with core measures running at comparable rates, offering a partial offset on the consumer-facing side. The critical insight is that the two distinct inflation vectors—energy-driven headline pressure from the conflict, and entrenched services stickiness—operate on completely different timelines: oil can reprice in a single session, but services inflation has proved resistant to rate differentials and supply normalization alike.
Tomorrow's February PCE release at 6:30 AM MT is the highest-stakes inflation print since the conflict began, capturing the pre-conflict baseline before oil-driven distortions begin flowing into the March and April data. FactSet consensus calls for headline PCE at +0.32% MoM and +2.6% YoY (vs. January's 0.28% and 2.8%), and core PCE at +0.37% MoM and +3.0% YoY (vs. January's 0.36% and 3.1%). Bank of America sees upside risk, projecting 0.43% MoM for core on the basis of tariff-driven goods price inflation and rising core goods, while Goldman Sachs targets 0.34% MoM. The distribution of outcomes is asymmetric and consequential: a print at or below consensus supports the ceasefire-driven narrative of easing price pressures; a print above 0.4% MoM reinforce the hawkish thesis and compresses the rate-cut expectations that the market began repricing aggressively today.
The Fed has held the funds rate at 3.50–3.75% since its March meeting, pausing a cutting cycle that began in late 2024 and has delivered 175 basis points of cumulative easing since September 2024. Wells Fargo abandoned its rate-cut forecast for 2026 before the ceasefire, and Citigroup pushed its first-cut call to September. Approximately 90% of futures participants currently price the rate unchanged through September, with consensus now coalescing around a single 25bp cut to 3.25–3.50% by year-end. The ceasefire has meaningfully shifted those probabilities intraday as the energy disinflationary impulse began repricing, but the committee's explicit data dependence—and Chair Powell's tenure expiring in May creating additional institutional uncertainty—means the path remains highly conditional on the next two inflation prints.
Key Takeaway
The Fed holds at 3.50–3.75% with a firmly data-dependent bias against a backdrop of core PCE at 3.1% YoY and services prices at multi-year highs. Tomorrow's February PCE print (core consensus +0.37% MoM, +3.0% YoY) is the pivotal gating event—BofA sees 0.43% MoM upside risk. The ceasefire revives rate-cut bets, but structural services stickiness limits the extent of any credible dovish pivot near term.
Risk and Positioning
Yesterday was one of the most confident days markets have seen in months — roughly three out of four stocks went up, and the market's fear gauge (the VIX) dropped nearly 20%. The ceasefire news flipped investor mood from anxious to optimistic almost instantly. That said, there are real reasons to stay alert: Iran's own parliament said the U.S. had already broken the ceasefire terms within hours of the deal, over 800 ships are still stranded in the Gulf, and gold — which tends to fall when people stop worrying — barely budged, suggesting investors aren't fully convinced the danger has passed.
Key Takeaway
The mood shifted sharply toward optimism yesterday — but the ceasefire is disputed and fragile, so that mood could reverse fast.
Wednesday's session was an unambiguous risk-on event driven entirely by a single geopolitical catalyst. The VIX collapsed 18.32% to 21.05—the largest single-session volatility compression of the conflict period—though it is worth noting that 21 remains well above the 14–15 range that characterized pre-conflict equilibrium, signaling that option markets are not yet pricing an all-clear. Market breadth was exceptional: 75% of U.S. equities advanced, all major benchmarks posted gains, and the Russell 2000 led with +2.97%—its strongest session since last April's tariff-delay rally—followed by the Nasdaq (+2.80%), Dow (+2.85%), and S&P 500 (+2.51%). Small-cap leadership in a broad breadth environment is qualitatively distinct from the narrow mega-cap-driven rallies that dominated January–February 2026, and it suggests genuine risk appetite re-rating rather than mechanical index rebalancing.
Credit markets responded constructively, with the ICE BofA High Yield OAS in April 2026 around 317bps—historically tight and inconsistent with a market pricing meaningful credit stress, though spread compression has left limited cushion against a re-escalation scenario. Gold's behavior provides the most analytically provocative signal of the session: despite a 2.5% equity rally and an 18% VIX collapse, gold added only +0.3% to close at $4,718.96—down more than 21% from its January peak but refusing to break further. Gold holding its ground on a major risk-on day is not characteristic of a clean haven-unwind; it reflects residual inflation anxiety (with PCE printing tomorrow), ongoing ceasefire fragility, and possibly technical support as the January-peak drawdown approaches exhaustion. Treasuries told a similar story of suspended judgment: the 10Y was effectively unchanged at 4.297%, caught between competing forces of haven-bid unwind (upward yield pressure) and rate-cut repricing (downward)—resulting in near-zero net movement.
The internal contradictions in Wednesday's rally are worth flagging explicitly. Liz Ann Sonders at Schwab compared the reaction to "nearly exactly one year ago when Liberation Day tariffs were delayed"—a pattern in which relief-rally euphoria preceded a re-engagement with the underlying structural problem. Iran's parliamentary speaker declared the U.S. had already violated the ceasefire within hours of the announcement, and more than 800 container ships remain stranded in the Gulf with no clear timeline for supply chain normalization. The DXY declined 0.52% to 98.998, erasing its year-to-date advance—a reflexive haven-unwind, though sustained dollar weakness would add a modestly inflationary impulse to imported goods prices that complicates the disinflation narrative the market is attempting to price today. Positioning risk is skewed: consensus has moved aggressively toward the resolution scenario, and any re-escalation from this level would find a crowded trade on the wrong side.
Key Takeaway
VIX compressed 18% to 21.05 but remains above pre-conflict norms, and gold's muted response (+0.3%) signals residual inflation anxiety despite broad risk-on conditions. HY OAS at 317bps is historically tight with limited cushion. Primary tail risk: ceasefire collapse or a hot core PCE tomorrow (>0.4% MoM) could rapidly reverse today's positioning.
Sector and Cross-Asset Analysis
The big winner yesterday was oil and gas companies — in reverse: because crude oil prices crashed more than 13%, energy stocks fell hard after months of leading the market. Tech companies, consumer businesses, and smaller companies picked up the slack and led the rally, since lower energy costs are good news for their bottom lines. International markets had an even bigger day than the U.S. — South Korean stocks jumped over 8%, because South Korea relies almost entirely on oil shipped through the Strait of Hormuz, and a ceasefire there is an enormous relief. The U.S. dollar slipped, gold barely moved, and Bitcoin climbed above $71,000 — all consistent with investors moving money back into risk assets after months of caution.
Key Takeaway
Energy stocks fell sharply as oil prices collapsed — almost everything else rallied, with smaller companies and international markets leading the way.
Sector performance on Wednesday executed a textbook geopolitical-risk-unwind rotation. Consumer discretionary, information technology, and communication services led the advance, as cyclicals that had been pressured by energy-cost and supply-disruption headwinds through the conflict period received a direct fundamental reprieve. Airlines and cruise operators surged on the dual tailwind of lower fuel costs and recovered demand outlook. The energy sector was the clear underperformer: WTI spot closed at $97.05 (-13.21%) and CL1! front-month futures settled at $94.41 (-16.41%)—the largest single-session crude decline since April 2020—and energy stocks, which had accumulated approximately 34% in gains year-to-date as crude approached $111+, gave back meaningful ground. The rotation out of energy and into cyclicals/consumer names is mechanically logical, but the sustainability hinges entirely on whether the Strait normalization proceeds without incident over the coming two weeks.
International markets provided the most dramatic cross-asset evidence of the conflict's economic asymmetry. The iShares MSCI South Korea ETF (EWY) surged more than 8% in Wednesday's session—South Korea's benchmark Kospi had posted its worst single day ever in early March due to near-total energy import dependence on the Strait of Hormuz. Asian and European markets broadly mounted significant relief rallies, and JPMorgan's overnight desk characterized the shift as a return to "the Global Growth Reboot tape" that characterized early 2026. The DXY's 0.52% decline to 98.998 erased its year-to-date advance as the haven premium came out of the dollar. Bitcoin topping $71,000 confirmed the breadth of the risk-appetite recovery across asset classes. The Russell 2000 leading U.S. large caps at +2.97% to 2,620.46 is significant: small caps carry higher domestic energy cost sensitivity and tighter credit profiles, and their outperformance today signals that the reflation/recovery thesis is reaching beyond the index heavyweights.
The fixed income cross-asset dynamic demands careful attention for what it did not do. On a day when equities advanced 2.5%, crude collapsed 16%, and volatility imploded 18%, the 10Y Treasury yield moved essentially zero—4.297%, -0.2bps—while the 2Y edged up a fractional 0.6bps to 3.798%, leaving the 2s10s spread near +50bps. This Treasury market paralysis ahead of tomorrow's PCE print reflects a deliberate posture: the bond market is declining to make a directional commitment until it sees whether the relief narrative survives contact with the inflation data. The 2s10s at +50bps represents a structurally steeper configuration than the inversions that dominated 2023–2024, consistent with an easing cycle that has normalized the front end, though the long end's relative elevation reflects persistent deficit and inflation premium that the ceasefire alone will not resolve.
Key Takeaway
Cyclicals, small caps, and international markets (especially Asia/Korea) drove leadership on direct ceasefire exposure; energy was the significant laggard on crude's historic decline. Bond markets declined to take a directional view, holding the 10Y near 4.30% ahead of PCE—an implicit signal that the fixed income market requires data confirmation before joining the risk-on narrative.
Economic Data & Events
Today's Calendar
- 6:30 AM MT — Core PCE Price Index (the Fed's preferred measure of how fast prices are rising) — High Impact
Expected: prices up about 3.0% vs. a year ago | Last month: 3.1%
- 6:30 AM MT — Personal Income & Spending (how much Americans earned and spent last month) — High Impact
Part of the same report as PCE — paints a picture of consumer health
- 6:30 AM MT — Weekly Jobless Claims (how many people filed for unemployment last week) — Moderate Impact
Expected: 210,000 | Last week: 202,000
- 6:30 AM MT — Q4 2025 GDP Final Reading (the government's last word on how fast the economy grew last fall) — Moderate Impact
Earlier estimates showed 1.4% annual growth — down sharply from 4.4% the quarter before
This morning is unusually busy, with three important reports all hitting at the same time. The inflation number (PCE) is the one that matters most — it will tell the Fed whether it can start thinking about cutting rates, or whether it needs to stay on hold. Tomorrow adds another inflation report (CPI), making this a two-day window that could meaningfully shift where markets head into the weekend.
Key Takeaway
6:30 AM MT is the moment to watch — today's inflation report will set the tone for markets for the rest of the week.
Today's Calendar
- 6:30 AM MT — Core PCE Price Index (February) — High Impact
Consensus: +0.37–0.40% MoM, +3.0% YoY | Previous: +0.36% MoM, +3.1% YoY
- 6:30 AM MT — Headline PCE / Personal Income & Spending (February) — High Impact
Consensus: +0.32% MoM, +2.6% YoY | Previous: +0.28% MoM, +2.8% YoY
- 6:30 AM MT — Initial Jobless Claims (week ending ~April 5) — Moderate Impact
Consensus: 210K | Previous: 202K
- 6:30 AM MT — GDP Q4 2025 (Third Estimate) — Moderate Impact
Advance + Second Estimate: +1.4% annualized | Q3 2025: +4.4% annualized
- 8:00 AM MT — Wholesale Trade (February) — Low Impact
Inventory and sales data; secondary read on business conditions
Week Ahead
Friday brings a second consecutive heavy inflation session: February CPI at 6:30 AM MT and preliminary April Michigan Consumer Sentiment at 8:00 AM MT—the latter includes inflation expectation components the Fed watches closely. Thursday and Friday together constitute a two-day inflation data corridor that will either validate or undercut the ceasefire-driven rate-cut repricing. Q1 2026 earnings season begins in earnest the following week, led by major bank reports.
What We're Watching
Monetary Policy: PCE as the Gating Print
The Fed holds at 3.50–3.75% with ~90% of futures pricing no change through September. Tomorrow's core PCE (consensus +0.37% MoM, +3.0% YoY) is the pivotal gating event—BofA flags 0.43% upside risk. A print above 0.4% MoM would reset rate-cut expectations and likely trigger selling in rate-sensitive assets.
Rates & Fixed Income: The 4.20% Test
The 2s10s spread sits at +50bps—meaningfully steeper than the 2023–2024 inversions—with the 10Y pinned near 4.30% on competing forces. Watch 4.20% as key support; a break lower signals the market is pricing an accelerated easing cycle. Duration positioning should remain neutral-to-short until PCE and CPI data confirm the disinflationary impulse.
Equities: Relief Rally Durability
Relief rally carries internal tensions: elevated forward P/E, partially degraded earnings estimates, and VIX at 21 above pre-conflict norms. Small-cap leadership (+2.97%) and 75% breadth are constructive signals. Durability requires verified Strait reopening and sustained lower energy—not just a two-week truce with an already-disputed terms record.
Key Risks: Ceasefire Fragility and Inflation Surprise
Primary risk is ceasefire collapse—Iran's parliament declared U.S. violation within hours of the deal, and 800+ ships remain stranded in the Gulf. A breakdown sends oil back above $110 and immediately reverses today's gains. Secondary: a core PCE print above 0.4% MoM tomorrow would undercut rate-cut expectations and expose elevated equity valuations.
The Bottom Line
Yesterday's ceasefire rally was powerful, but this morning's inflation data is the real test — a good number extends the rally, a bad one could erase it. Expect a volatile open around 6:30 AM MT, with the ceasefire's staying power as the week's second major wildcard.
Treasuries are range-bound at 4.297% on the 10Y, suspended between haven-unwind selling and rate-cut repricing ahead of tomorrow's 6:30 AM MT PCE print—the session's definitive macro catalyst. Equity internals were broadly constructive (75% breadth, small-cap leadership), but the VIX at 21 and technical resistance near 6,800 SPX indicate the market is not yet pricing all-clear conditions. Thursday's directional bias is binary on PCE: a benign core print at or below 0.35% MoM extends the rally toward 6,850+ SPX and drives the 10Y toward 4.20%; a hot print at or above 0.4% MoM challenges the rate-cut narrative and pressures rate-sensitive positioning across the curve. Geopolitical headline risk remains the primary intraday override—any confirmed ceasefire violation or Strait of Hormuz disruption immediately supersedes the data narrative.
Disclosure — AI-Assisted Content & Regulatory Notice
This briefing was drafted with the assistance of artificial intelligence tools. All content has been reviewed and approved by Thomas MacPherson, Investment Adviser Representative (Series 65) and Chief Compliance Officer, River Rose Financial, LLC, prior to publication. AI systems may produce errors, omissions, or outdated information; readers should independently verify data.
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