Monthly Macro: Strait of Hormuz Shock Meets Sticky Inflation

Chris T

Welcome to William Blair Thinking Presents, the podcast series that aims to provide in-depth expertise from our award winning equity research and capital advisory teams on today's financial and economic landscape. I'm Kristen is at of equities, marketing media relations and I'm delighted to be your host. Hey everybody. Today is Thursday, April 30th, 2026. Welcome back to another episode of Monthly Macro.

00:29, Chris T

It's been another extremely active month for markets. With the war in Iran continuing to sit at the center of the macro conversation while inflation fed policy and asset allocation debates are becoming more interconnected by the day. Joining me, as always, is is William Blair macro analyst Richard is off to discuss Richard. Great to have you back.

00:46, Richard D

Great to be back Chris.

00:47, Chris T

Let's start with the war. When investors think about this conflict, what are the key questions is whether, you know, higher energy prices eventually by demand. Where are we right now and are we actually seeing meaningful demand destruction yet?

01:03, Richard D

Yeah, I think it's, you know, unfortunately, still very much in the in the fog of war. You know, it's still all about the Strait of Hormuz. It's all about the flow of oil and other products, you know, like fertilizer, helium, all that stuff. And, you know, there's there's a lot of confusion. I think there's, you know, some people are saying the strait is it's it's like Schrodinger's Strait at the moment, sort of neither open or closed.

And I think if we look back, though, what was happening pre-war is you had something like 100, 130 vessels passing through the strait per day. And now it seems to be anywhere from sort of 0 to 10. So you have these kind of shadow fleets passing in and out. But I think, you know, even with that, the reality is it's it's effectively close.

And, you know, I think the same thing we can see about negotiations between Iran and, and the U.S., you know, those so far seem to failed with, you know, quite some ridiculous demands by the Israeli Iranians on on one side. And, you know, I think the, the other question when we think about that, though, is, is who is the U.S. actually negotiating with?

You know, not only is it unclear, you know, who the actual, you know, Iranians in charge are, but, you know, as we've talked about before, on, on on this podcast, Chris, it seems like Iran is sort of just one battle in the kind of much greater global geopolitical, geostrategic war against China, just like Venezuela. So, you know, is Iran just effectively a proxy for China?

You know, is is the U.S. really just kind of negotiating with China? My guess would be that, you know, China doesn't really want to see the strait fall into into the U.S.'s control. So, you know, if they're the ones that the U.S. is, is really dealing with instead of the Iranians. And I think that negotiation becomes even, even tougher.

And it seems like it's going to last longer. And that's what President Trump seems to have told us, you know, over the last few days and, you know, on the demand destruction side, you know, again, I think the way to think about this is, you know, first, this is a massive global supply shot. And the longer this continues, the more though this sort of morphs seem to, a demand shock.

And, you know, what we're talking about is we had something like, you know, 20 million barrels of oil going through the strait every day. You know, the the world Bank just put out a recent report out saying how how much of that is actually be substituted. They say, well, you have about of that 20 million, maybe 1.5 million is being replaced by OPEC countries.

5.5 million is now going through that East-West pipeline in Saudi. The Ambu pipeline, 3.3 million can be deducted from existing inventories and maybe 4 million from previously sanctioned oil like, like Russia, and then a half a million from higher income countries and half a million from biofuels. So that leaves basically 4.6 million barrels that the world is kind of short with right now.

And then as those inventories come down, that's about 8 million barrels in total, which is about 8% of total consumption. And not to mention and what's happening with fertilizer, LNG, helium and all those sorts of things. So I think these, you know, supply shortfall, you know, we're we're left with, with basically two choices is if you can afford it, you, you pay a lot of money for what stock is available.

So it's sort of beggar thy neighbor type thing. You're stealing demand. You're stealing supply from from lesser well-off countries. You can't afford it. And and option two is if you can't afford it or you can't get it, is you put in in place those demand restrictions or demand reduction measures and that's what many of these sort of less well-off countries are doing, like Southeast Asia, India, you know, countries like that.

And, and that means driving less, flying less, working from, shorter workweeks, reducing temperatures on air conditioning units, all this sort of thing that, you know, we're sort of looking at from a distance in kind of the western, more developed countries. We haven't really felt all of that. What we're seeing at the moment is basically higher gas prices where, you know, certainly in the U.S. those are increased now above four, four, 20 a gallon.

But I don't think we've seen so much demand destruction. Yeah. I mean, I think I think the the thing that we're going to see first is jet fuel, you know, that seems to be a really hot area where supply is very, very limited. So I thought it was interesting that I read that California. So so the U.S. is actually a net jet fuel exporter as they are with energy in total.

Right. So but you could still have regional issues. And I saw that California actually imports just about all of their jet fuel from South Korea.

06:49, Chris T

Oh is that right. Oh interesting. Yeah.

06:51, Richard D

So California basically chose to shut down all of their jet fuel refineries, which means they're forced to to import that. And so even though the U.S. is a net exporter, if they actually want to get jet fuel from, say, Texas or Louisiana, they have to, you know, that that fuel has to, you know, be shipped down through through Panama, through the Panama Canal and then back up to to LA.

Great. Incredible. How these things, transpire, I think for the U.S. and Asia, what we're seeing is definitely some airlines have been talking about or in the last month or so that they have maybe a couple of weeks left of inventory of, of, of jet fuel. So they're going to have to start rationing like we.

07:43, Chris T

Haven't seen the impact yet to their cost.

07:46, Richard D

Not yet. No, no. But I think we're starting to. So you know, they're saying they're going to ration it for in the next few weeks. So for take take for example like short haul flights. So for example, next week I'm supposed to have a flight from I think it's Frankfurt to Munich or vice versa, which probably should have been done on the train in the first place because of actually much easier.

But but look, that's exactly the kind of flight which, you know, the airliner I'm booked on will probably get canceled. So I don't think it's been canceled yet, but I wouldn't be surprised if it does, because as those are just kind of silly flights that they could save energy on. So I think basically, I think what we're seeing is what I'm looking at is, is we're still sort of seeing these kind of concentric circles of, of where the impact from the Middle East and these sort of shortfalls is, is it sort of hits the Southeast Asia and Australia, these kind of countries first, then it sort of ripples out across Europe, and we kind of see it in jet fuel prices. And then sort of it filters out to even some of the big North America, which are energy independent, but they do still feel it through less demand globally for products and services and, and higher energy prices more generally.

09:02, Chris T

All right. So let's move to inflation. We had a fed meeting yesterday. And this conflict is obviously adding another layer of complexity. How is the fed thinking about inflation in this environment especially with energy back in focus.

09:16, Richard D

Well I think that I think it's it's it's it's the fog of war at the at the FOMC as well. This is the war of independence. You know the ad from C U of the fed against the Trump administration. I think that was on plain view yesterday. And I think it was interesting what we what we got from the FOMC was four dissenting voters, which we haven't had since 1992.

09:42, Chris T

I was that right? I was I was wondering about that.

09:45, Richard D

Yeah. I mean the first one Steven Marin okay. No surprise there. You know he won at a quarter point cut. So that's nothing unusual I think what was unusual was to not only have three dissenting voters as of regional fed president. So that was hammered. Kashkari and Lori Logan of the Dallas Fed. But I think the nature of their dissent was was unusual in that they agreed with the policy outcome of no change in rates meeting.

But what they were actually dissenting over was the inclusion of an effectively an easing bias in the statement. So they're objecting to the sort of forward guidance that the next move in policy rates could be an easing instead of an unchanged or, you know, even a rate hike. And as far as I remember, I don't ever think I've seen anyone voting against the bias in the statement.

What does that tell you? I think you know, you could take that as sort of a pushback that, you know, new incoming Fed Chair Kevin Warsh is is not going to have an easy ride. And I think the other thing that kind of supports that is Chair Powell basically telling us that he's not planning on abandoning or vacating his governorship, which remains in place until 2028, even though he loses his spot as, chair of the fed next month.

So, you know, I think that is is pretty interesting. I think then with regards to what all this means for inflation about, you know, the war, you know, it's it's pretty obvious that energy prices, even as we move out of this war, I don't know when that's going to happen, but this sort of, you know, temporary so-called price spike still seems like you're going to be left with, you know, a bit of, embedded risk premium across energy prices and across commodity markets when we come out of this thing.

So you won't necessarily have a full downward retracement back to previous, previous pre-war levels. So I think that's, you know, it's it's somewhat inflationary from from that perspective. And then once again, you know, this sort of just adds to what is been my general view that that inflation was actually accelerating even before the war. So if you look at measures of super core inflation, so you take out the most volatile bit food and energy and housing services, that was rising sort of since mid-year last year.

You look at the price of haircuts, so maybe call it super, super, super core inflation. You know that that's kind of inflation. But it's interesting to look at because it's not impacted by trade. It's not impacted by the dollar. It's not impacted by tariffs supply chains or energy shortages. You know it's really just impacted by, you know, make some rent and the price of labor for the for the barber.

13:08, Chris T

Is is like a little perception as well.

13:10, Richard D

You reception you know but not much. So so it's good it's a good measure of sort of services and wages. And I think what we seen there, if you look at that is before Covid, the, the average growth rate there about inflation was about 2.5%. Since Covid it's been 4.9%. You know, at the last reading was 4.6%. So it's really been sticky around those levels.

So again, another sort of sign that this thing, you know, hasn't changed. And I guess the last thing I would I would add is that was pretty interesting. The thing was about two weeks ago now that Chris Waller of the fed, fed governor, who's been again, one of the super doves, who has been consistently advocating for rate cuts, and back in November, I went to a dinner in London with some colleagues and clients where, Waller was was the guest speaker.

And, you know, he then was arguing that the recent softening that we've seen in the labor market was mostly due to demand side weakness. And I think I've had the view that it's actually been more likely due to supply side weaknesses, i.e. companies are finding it difficult to find workers to find labor. So the demand is kind of there.

But employment growth has slowed because the workers are so. But what I was into, what I was thinking was interesting. Was this this month or a couple of weeks ago, he basically came out and kind of changed his view and, you know, thinks that the slowdown in the split in the labor force is more about the supply side, that, you know, population growth and labor force growth has has slowed quite significantly.

And that means that the new breakeven level of employment growth is much lower than it was, which we kind of knew. He now pegs that at basically zero, right. That's how much growth in employment you need per month just to keep the level of, the unemployment rate unchanged. You know, factoring in, steady employment, population growth.

So I think, I think that's, that's, crucial. I think it's crucial for, for two things. One, because it means that if you have, a zero breakeven level for, say, non-farm payrolls, it means you're probably going to see more negative non-farm payroll readings going forward. And the implication of that being that the market shouldn't necessarily interpret those as hard evidence.

If we see a negative print or two months of negative print that we're heading into recession, remember that, you know, non-farm payrolls, previously, the breakeven level was about 125 to 100. About 150,000 per month, say, back in 2024. If it's now zero, you know, that's a that's a different ballgame. You're going to see some some negative readings. And I think the market would be mistaken to necessarily then interpret that.

If we do see zero, as super dovish. And then the second thing is, is this really is a supply shock or that for that labor market, you don't really or you don't necessarily. The central bank doesn't necessarily respond to those labor shocks with lower rates. So if the demand side is solid and you're starting to to lower rates, you're just kind of exacerbating, the problems that, that you're already getting to.

So that's I think for Kevin Warsh going forward, you know, what the fed is, is basically telling us here is don't don't think it's going to be an easy ride.

17:07, Chris T

So some would argue that I changes this whole picture. You know, productivity gains eventually do the hard work bring inflation down. And you've heard that likely new Fed Chair Kevin Warsh views AI as potentially giving the fed room to lower rates. How do you think about that?

17:26, Richard D

Yeah, I think that's a huge argument for him. And, you know, he's sort of looking back at what happened in the in the mid 1990s where Greenspan didn't actually lower rates, but he held back on, tightening rates and convinced the rest of the committee that we were in the midst of a productivity boom and and raising rates that would be escape.

I think I, in the near term, I think is actually inflationary. I think, over the longer term, it's a, you know, a couple of years from now it's going to be more disinflationary. But I think, I think you have a few things going on. You know, what we have seen is it's true that, that the price of compute of AI compute and tokens and whatnot has, has come down quite dramatically and continues fall in sort of Moore's Law kind of way.

But at the same time I use has skyrocketed. So it's sort of this Jevons Paradox type scenario. And I think what we're seeing is that maybe previously a year or so ago, where, you know, you, Chris, might have just been tapping on your computer book compute Cuba keyboard can't speak, right? Keyboard into, you know, ChatGPT asking it the odd prompt about, you know, whatever what to get for lunch today.

And now I think you've probably got at least a couple, if not a few, you know, agents running, sub agents running that, you know, are constantly prompting your Lem every minute of the day for something. And you know, what that means is every prompt, costs compute money, cost, tokens. And the cost of those is actually going through the roof.

So at some point, you know, this someone's paying the bill here. Your company, our company is paying the bill here. And maybe they're going to start to have to, to ration that. You know, if, if those costs go up like, like maybe for, for us in, in equity research, you know, we clearly need to drive the Ferraris in terms of, access to, to compute.

But you know, maybe sales and trading, you know, maybe they get the Corolla. So they. 20:12, Chris T Might I like that it might let you.

20:01, Richard D

Like that. Now maybe they will know though. Yeah.

20:04, Chris T

Right. Okay.

20:05, Richard D

But I think the point is, is that, you know, the aggregate spend is is rising, you know, potentially by, by quite a lot. I think these companies, the hyperscalers are clearly spending billions of dollars on these things. And they need to get a return on that in the future. So I think that's not so disinflationary for the moment.

I was actually looking at semiconductor prices. So in in the producer prices index here, you can break it down by all the various components and, and semiconductor prices have, have actually risen in March by 17.9% in February. So again, this is not a war thing. In February they were up 16.5%. And again, that's a reflection of there's been huge demand for this stuff.

There's a limited number of producers or just really just a small handful of those, and all the material costs have gone up and are continuing to go up like copper and aluminum, silver. And, and you've had, you know, less efficient supply chains. And you know, if, if semiconductors, as we keep getting told, are the new oil because they're sort of this necessary input to, to just about everything, then, you know, that's something that the fed should be, should be thinking about.

So I think the market right now is, is pricing in the increased possibility of, a fed rate cut later this year. And, no, I don't I don't think that's baked in the cake at all. And I actually think there is potentially, a greater probability of a rate increase, in the coming year than, than a cut.

21:52, Chris T

So if we zoom out and connect all of that. So, you know, war driven energy risk, sticky inflation, shifting fed expectations, what does that ultimately mean for bonds and equities. Yeah.

22:05, Richard D

So I've been thinking about this. Been written about this a bit too. And people are obviously talking about it a lot too because it's kind of the main thing. But, you know, I think again, starting from at least my view that the inflation regime has changed and changed in 2020. And I think the flipping of the stock bond correlations, which happened in 2020, was the financial markets acknowledging that shift.

Right. And it hasn't shift shifted back yet. And one of the things I've argued is for investors, that means they need greater diversification. They need to give put that diversification into their portfolios against risk, because bonds that are now positively correlated are no longer reliably giving you that same amount of portfolio protection as you had before. And one of the pushbacks that I recently saw in a note, a couple of weeks ago, was saying that just because the correlation between stocks and bonds has turned positive, that doesn't mean that stocks are now a better diversifier than bonds.

Right? So the argument being that stocks are still more positively correlated to each other than they are to bonds, even though bonds are now positively correlated. So you're not actually reducing portfolio risk by diversifying into other stocks. And that's definitely true. But I think only up to a point. And what I think here is, is, again, notable is that, you know, the regime has changed.

And I think what bonds do is they protect you basically against one thing. They protect you against downside economic growth risk. Right. What they don't do is protect you against upside inflation rates. And I think why you need greater equity diversification is that in the old world when there was this negative correlation of stocks and bonds there were no upside inflation risks.

There was there was no frictions on supply side of economy. And you just needed that 6040 portfolio. And today we have a ton of new frictions from tariffs, immigration, war, whether, you know something seems to be constantly happening to impact the supply side and disrupt that. And what that means, is that the inflation risks are either now asymmetric, whereas they were previous or symmetric, whereas they were previous asymmetric or even maybe skewed to the to the upside.

And what equities do and bonds don't do is at least they offer you some added protection against upside inflation risks. Whereas bonds just sort of compound those losses. So I think that we have basically a lot of conflicting and we're reinforcing narratives out there that we didn't have before. And so I think for investors that means that A, you should be looking at diversification and holding quality stocks, which have actually been quite out of fashion for several years now, and I think they're quite attractively priced, relative to history.

B, I think, you know, start paying closer attention to valuation because we live in a more uncertain world than we did previously. I think valuation is a key to giving you sort of a cushion against some of that uncertainty. So your sort of your risk premium is is higher. And I think c that means, you know, spreading the net a little wider in terms of size sector and industries and you know, holding, you know, some some diversification there which you weren't necessarily holding before.

So it doesn't mean not holding bonds. It just means that the reason for holding bonds has kind of shifted, where now you're investing them in more for yield as opposed to purely kind of downside protection. Where what you what you were doing. So previously.

26:37, Chris T

All right. Well, this has been very helpful, Richard. Thanks for walking us through. Thanks, everyone, for tuning in. We'll see you next time. I'm Matthew Macro. For more, head to William blair.com dash thinking where you can browse our library of whitepapers, market updates, webinars and other resources designed to provide actionable intelligence for emerging opportunities. If you like what you heard, share and subscribe wherever you get your podcast.

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