As I grow older, I pay less attention to what men say. I just watch what they do. - Andrew Carnegie
As I grow older, I pay less attention to what men say. I just watch what they do.
Headlines can shift by the hour, and markets can swing with them. But when it comes to the inflation and economic outlook, the most important question is simpler: are barrels moving through Hormuz again, or not?
For most of the past year, east-to-west crude tanker traffic through the Strait of Hormuz remained broadly stable, with around 100 crude oil tankers crossing per day. Its collapse marked the point at which the Iran conflict began to disrupt the real economy.
Markets can rally on de-escalation rumors, oil can swing on rhetoric, and rates can move on shifting Fed expectations, but the macro outlook will depend on whether energy is actually moving again through one of the world’s most important chokepoints.
This is a natural next step from the last few weeks. A Crude Reality for Fed Rate Cuts showed how the oil shock pushed the market to price out Fed easing, The Oil Shock May Not Stop at the Pump argued that fertilizer and food could become deeper transmission channels, and The Risk of Replaying Last Year’s Script suggested that this macro shock could prove much harder to reverse than last year’s tariff episode. The question now is whether that reversal is actually taking place.
Foreign official holders have reportedly been selling Treasuries as higher oil prices and a stronger dollar pressure oil-importing economies, while prompt crude cargo prices have surged on fears of supply shortages. Those are still downstream effects. The key issue is whether the disruption in Hormuz is easing or becoming embedded.
Softer headlines do not restore commerce, and ceasefire statements do not secure tanker passage. Continued disruption in tanker traffic would show that the shock remains real regardless of the diplomatic language.
Continued depressed Hormuz traffic would imply tighter energy flows, higher freight and insurance costs, and more persistent pressure on crude and refined products. The first effect would be inflationary, but higher energy costs would also squeeze household purchasing power, pressure margins, weaken confidence, and tighten conditions across oil-importing economies. In that environment, the shock would carry broader economic consequences.
A meaningful rebound in crossings would support the view that the shock was acute and temporary. Continued readings near zero, or only marginal recovery, would point to rising inflation risks and growing economic damage as the Iran conflict continues to transmit through the real economy.
The more immediate issue is whether the world’s energy arteries are functioning again. Failure to restore those flows would keep inflation elevated longer than many hope and would spread the damage beyond the pump.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
