I mentioned yesterday that we weren't taking the latest positive tone/headlines for granted, and that "this is an extremely fluid situation, subject to change on a dime." Which, per the following, has been frustratingly borne out since yesterday's note:
PWAI: The situation in the Middle East deteriorated sharply this weekend, reversing the brief optimism that had lifted markets on Friday. Iran's Foreign Minister declared the Strait of Hormuz "completely open" to commercial shipping on Friday, sending oil prices down more than 10% and pushing U.S. equities to fresh record highs — but the rally proved short-lived.
As of Saturday morning, Iran reversed course and closed the strait again, firing on ships attempting to pass, after the United States pressed ahead with its naval blockade of Iranian ports. Iran's joint military command stated that "control of the Strait of Hormuz has returned to its previous state," citing the U.S. refusal to lift the blockade as justification.
The episode underscores a dynamic we have been tracking closely: diplomatic declarations and physical passage through the strait are two separate things, and the gap between them remains wide. The ceasefire between the U.S. and Iran is set to expire Wednesday, April 22nd, with Pakistani mediators working urgently to arrange a new round of talks before the deadline — failing which, Trump has signaled the U.S. would resume military strikes. We are closely monitoring developments and managing the portfolio accordingly.
The improving tone of the past couple of weeks has had a notable impact on markets, and on our core allocation -- essentially, for the moment, retracing the entire decline since the war began... Which, in our case, represents quite the premium above what the major equity averages have printed year to date -- which is something else we in zero way take for granted going forward.
I just completed the weekend scoring of our PWA Index, and, at the margin, conditions continue to deteriorate -- which for now does not place us in the recession camp... Again, should geopolitical conditions improve -- political incentives virtually demand that they do -- heading into the back half of the year, it makes sense -- heavy volatility (and inflation risk) notwithstanding -- to remain on-balance constructive on the economy, and on risk assets for the time being.
Here's this week's PWAI macro assessment:
PWA INDEX — WEEK OF APRIL 14, 2026 Official Score: −5.88 | Prior: −4.41 | Direction: ↓ Continued Deterioration
The PWA Index declined modestly for the second consecutive week, extending its move into negative territory. The good news is that the pace of deterioration slowed significantly from the prior week's sharp drop. The less encouraging news is that conditions continue to weaken rather than stabilize.
The U.S. economy is sending conflicting signals right now, and understanding that tension is key to interpreting current markets.
On the positive side, the labor market remains genuinely strong. March added 178,000 jobs — nearly three times what economists expected — and weekly unemployment claims fell to their lowest level in months. Consumer spending at the retail level is holding up, supported in part by this year's larger-than-usual tax refunds. Freight demand, as measured by the Baltic Dry Index, is healthy. Business credit growth is robust.
On the negative side, actual economic output is softening. Industrial production contracted in March. Business investment plans are being scaled back. The Atlanta Fed's real-time GDP estimate for the first quarter has declined from 2.7% just four weeks ago to 1.3% today. Consumer confidence has fallen to its lowest level in over 70 years, driven largely by anxiety over the Iran conflict and its impact on energy prices and the broader cost of living.
Inflation is the index's biggest concern. Prices at the producer level are rising at their fastest pace in three years. Import and export prices are surging. Consumer inflation expectations have spiked sharply. While some of this reflects the direct impact of the Middle East conflict on energy costs, the underlying inflation trend was already running above the Federal Reserve's target before the conflict began. The Fed has little room to cut rates to support growth without risking further inflation — the classic stagflation dilemma.
The most encouraging development this week was in commodities. Oil prices have declined roughly 15% from their March peak as a partial ceasefire opened limited shipping through the Strait of Hormuz. Natural gas prices have fully reversed their war-driven spike. If the ceasefire holds and energy prices continue to moderate, the inflation picture could improve meaningfully over the next several weeks.
Markets responded positively to the ceasefire news, with stocks outpacing bonds by the widest margin in months. Sector leadership remains concentrated in energy, materials, and industrials — areas that benefit from the commodity cycle — while consumer-facing and financial sectors continue to lag.
The next two weeks bring the most important economic data of the quarter, including the first official estimate of first quarter GDP growth, March consumer spending, and updated inflation readings. These releases will go a long way toward clarifying whether the current slowdown is temporary and manageable or something more structural that warrants a repositioning of expectations.
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