As the seventh week of the conflict in the Middle East comes to a close, the attention of financial markets remains squarely focused on the comments of officials in relation to a sustained resolution. Iran’s foreign minister announced Friday morning that the Strait of Hormuz would be open to commercial traffic during the recently negotiated 10-day ceasefire between Israel and Lebanon. This was met by a positive reaction in financial markets, but geopolitical risks are likely to remain elevated until a permanent resolution is achieved. The S&P 500 rose 4.4% this week to a new all-time high (Chart 1), while WTI oil fell 16% to $81/barrel as of the time of writing.

Economic data releases were sparse this week, but we did get an update on the housing market, which showed a 3.6% decline in existing home sales in March. The conflict in the Middle East and concerns regarding its impact on inflation has led to upward pressure on U.S. Treasury yields and subsequently mortgage rates. With mortgage rates continuing to fluctuate near a 6-month high of 6.4%, housing demand is likely to remain soft to start the spring buying season.

On the inflation front, the producer price index showed a sharp uptick in March, with energy prices driving the annual percentage change in the final demand index to 4% - the highest level since early 2023 (Chart 2). Similar to the March consumer price index report, spillover of higher energy prices into core inflation was largely absent, but this will be a key risk the Federal Reserve will be monitoring moving forward. If the current downward trend in oil prices is substantiated by a concrete resolution to the current supply disruptions in the Middle East, then this inflation shock is likely to prove transitory. However, risks remain skewed to the contrary the longer it takes for a permanent resolution to be achieved, with material impacts on households and businesses already occurring.

In the Federal Reserve Beige Book for April 2026, the conflict was cited as a major source of uncertainty that complicated decisions around hiring, pricing, and capital investments. In addition to higher energy costs, which were reported across all regions, businesses also reported facing input cost pressures from tariffs on metal products – which were expanded at the start of April – in addition to higher technology costs. Cumulatively, businesses noted these pressures were leading to margin compression, which could weigh on economic growth moving forward when combined with elevated uncertainty.

Comments from Federal Reserve officials this week were cautious overall. New York Fed President Williams stated on Thursday that stagflation risks were a concern, but also that the current stance of monetary policy was well-positioned to deal with the impacts of the conflict. Chicago Fed President Goolsbee also noted this week that the longer the conflict persists, the less likely rate cuts are for this year. In the wake of lower oil prices Friday morning, markets have increased bets to better than 50-50 that the Fed will cut rates a quarter point by the end of the year.