Producer Prices Up 6% YoY as Hormuz Flows Drop 30%; Rate-Cut Expectations Fade

The Iran conflict has upended global energy markets in ways that macro models were slow to price in. The Strait of Hormuz, the world's most critical chokepoint for oil transit, saw flows drop by nearly 6 million barrels per day in the first quarter of 2026, according to the EIA. This represents a seismic disruption to supply and has pushed US producer price inflationThe rate at which prices rise across an economy. to 6% year-over-year, a level that crushes the narrative of a soft landing and near-term Fed rate cuts.

The bond market has responded with conviction. Thirty-year Treasury yields broke through 5% for the first time since 2007, signaling that investors no longer believe the Fed has the room to cut rates in the near term. Fed officials like Michelle Collins and Neel Kashkari have reinforced this view, with Kashkari explicitly stating that inflationThe rate at which prices rise across an economy. is too high. This is a direct rebuke to market pricing that had penciled in cuts as early as June. Gold has held its recent decline on the back of higher real yields, and the dollar index remains elevated on the view that monetary tightening will persist.

Emerging markets have borne the brunt of this shock. Foreign-exchange reserves across Asia have been drained as central banks defend their currencies against oil-driven inflationThe rate at which prices rise across an economy.; the Philippines and India have been hit hardest. Bangladesh's credit rating outlook was cut to negative by Fitch specifically due to its vulnerability to the Iran war's energy fallout. Pakistan's economy accelerated in recent quarters but faces darkening medium-term risks from sustained oil price pressure. Airlines like Air New Zealand have posted full-year loss guidanceCompany-issued forecasts of future financial performance. as jet fuel costs spike.

The bull case hinges on energy supply recovering faster than consensus expects, or on geopolitical de-escalation that allows Iranian barrels to return to market. However, the forward curve for oil has not yet priced in a meaningful supply recovery, and the political will to settle the conflict remains unclear. If energy prices remain elevated through the summer, the Fed will have no choice but to keep rates higher for longer, invalidating the equity market's current growth-and-cut narrative.