February 2026

The capital markets have been upended since the start of the war with Iran.  The price of oil has skyrocketed, dragging the price of bonds sharply lower.  At the time of this writing, the 2-year note is trading at 3.74% yield to maturity, the highest since last November.  Similarly, the yield-to-maturity of the 30-year bond has risen to 4.87%; below the 4.92% touched in January, but 25 basis points above where it started the month.  The logic for the rise in interest rates is speculation that the spike in the cost of oil is going to filter through to the CPI making it impossible for the Fed to cut rates further.

After reaching a near term high of $119/barrel, the price of oil is trading in a range between $80 and $95 a barrel.  President Trump has repeatedly commented that the war is almost over and yet it continues to drag on, weighing on the equity market.  Several high-profile market forecasters had called for a much more draconian move but so far, the downside has been limited to less than 5%.

While the war news has dominated the headlines recent economic releases have portrayed a weakening economy.  There was hope that the February employment report would follow the January report in showing an above expectations outcome.  But that did not come to pass.  Payrolls contracted by -92,000 jobs in the month coming in well below the consensus expectation of +55,000.  The unemployment rate ticked up to 4.4% from the 4.3% recorded in January.

Taking a backseat to the employment data was the retail sales report for January.  Total retail sales fell -0.2% versus the December total.  However, core retail sales excluding auto and gas rose a healthy 0.3%, matching consensus expectations.  Moreover, on a year-over-year basis total retail sales grew 3.1%.  We interpret the report as indicating that the consumer continues to be willing and able to spend, but we wonder how long that will hold up given the spike in gas prices since the start of the war.

The February Consumer Price Index report was a mixed bag with the core CPI year-over-year at a multiyear low of 2.5%, but the headline CPI rose to 0.3% month-over-month.  Investors are looking past last month’s CPI amid worry that the result for March is going to show a larger uptick.  Initially, the expected rise is likely to be confined to the energy component and not the core calculation.  However, we are not overlooking the risk that if the war drags on we expect that transportation costs will begin to creep in the core category.

Taking the decline in employment, the mediocre retail sales and a relatively benign inflation report into consideration, we don’t see it as likely that the Open Market Committee will cut the overnight rate at its March 18th meeting.  Surely there will be a discussion about the employment situation and as was seen at the February meeting there is likely to be at least one dissenter, but we don’t anticipate any movement.  In fact, in the post meeting press conference Chairman Powell is likely to be peppered with question about his thoughts on energy prices.

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