To The Moon

Following a year of trade, immigration, and other shocks, the U.S. economy now confronts a new test. President Donald Trump's decision to launch open-ended strikes against Iran, with the stated aim of overthrowing the long-ruling Islamic government of the Middle Eastern nation, is likely to heighten uncertainty. As retaliatory attacks unfold across the region and President Trump indicates the conflict could persist for at least several weeks, analysts are focusing on a range of difficult-to-quantify factors. Over the weekend, oil prices surged from $70 per barrel to nearly $80, and shipping through the strategic Strait of Hormuz has begun to decline. Although the United States is more insulated from energy shocks than many allies due to its own oil and gas production, the conflict's impact on global trade, prices, and investment could negatively affect the U.S., potentially undermining the previously optimistic outlook for solid economic growth this year. A recent survey by The Conference Board showed that CEO confidence in the U.S. economy and their own industry prospects had improved, yet nearly 60% stated that geopolitical tensions are highly likely to act as a disruptive force. In its latest U.S. economic assessment, the World Bank described the outlook as "strong," but this view must now be tested against the turmoil of an unpredictable conflict in a major oil-producing region, which will impact global shipping, supply chains, and commodity prices. J.P. Morgan economist Joseph Lupton wrote in a report following the weekend U.S. bombing of Iran, "A pillar of our 2026 outlook was the observed 'fading of caution' in U.S. policy. Early-year data suggested businesses were emerging from paralysis regarding hiring and non-tech capital expenditure and beginning to deploy their robust profits and capital. This nascent recovery is now at risk. Layering a military war on top of an ongoing U.S. 'trade war' could reignite concerns about global stability." The extent of the impact, including whether it influences Federal Reserve monetary policy, depends on how much the conflict drives up global oil prices and whether, over time, the conflict risks escalation and expansion or evolves into a more internal power struggle following the death of Iran's Supreme Leader Ali Khamenei in an airstrike. The Russia-Ukraine conflict that erupted in 2022 presented similar global risks. The initial response from the U.S. central bank was dovish, with officials scaling back plans for significant interest rate hikes that spring. However, the Fed's concerns quickly shifted back to sharply rising inflation, leading to an acceleration of rate increases. SGH Macro Advisors Chief U.S. Economist Tim Duy wrote on Monday, "Conflict with Iran is an unknown, though markets could lose interest quickly if the situation appears likely to evolve from a regional conflict into an internal one." SGH President and CEO Sassan Gahramani highlighted the uncertainty of the current moment in a separate report. Born in Tehran, with a father who served as an Iranian diplomat prior to the 1979 Islamic Revolution, he noted the potential for civil war in Iran and the possibility that "Tehran could employ a 'scorched earth' strategy against other civilian centers to escalate the conflict... damage the global economy, and pressure an end to the war." The risk of a protracted asymmetric campaign appears significant. Initial market impacts seem contained. Interest rate futures show little change in expectations for Fed rate cuts at the July and September meetings. The yield on the two-year U.S. Treasury note fell over the weekend, a typical reaction as investors seek safe-haven assets during global crises, but yields recovered on Monday, possibly indicating market concern about rising inflation, at least globally. The U.S. dollar, another safe-haven asset, rose against a basket of major currencies. Major U.S. stock indexes were mixed in midday trading. Citigroup analysts wrote in a Monday report, "We do not see geopolitical developments significantly impacting the Fed's policy rate plans; small upside risks to inflation will be offset by less favorable financial conditions," with the focus remaining on domestic data. "We expect Friday's report to show 55,000 new jobs added and an unemployment rate of 4.4%, a reading that should keep Fed officials optimistic about labor market stabilization." The U.S. Labor Department is scheduled to release the February employment report on Friday. Carlyle Group Vice Chairman James Stavridis and the firm's Chief Strategist for Energy and Related Commodity Markets, Jeff Currie, highlighted the difficulty of predicting the conflict's trajectory. They assess the probability of Trump successfully replacing the current Iranian regime at only 30%, while the Islamic Revolutionary Guard Corps could mount "asymmetric" responses beyond obvious chokepoints like the Strait of Hormuz. Iranian drones did attack Qatari gas facilities, leading to a suspension of liquefied natural gas production at facilities using the strait. However, Stavridis and Currie stated their focus is on the "baseline probability of 70% or higher for a protracted asymmetric campaign, including cyber activity, terrorism, and proxy forces potentially spilling into Iraq," OPEC's second-largest oil producer. Despite U.S. military focus being around Iran, they asked, "But who protects Mozambique's LNG?"