Macro is starting to shift again, from an inflation shock to a more complex stagflation narrative.
The Iran conflict continues to dominate, with oil markets at the centre of the story. Brent has surged to around $116 a barrel, up more than 50% in March, as disruptions through the Strait of Hormuz persist and the risk of prolonged supply constraints remains elevated. What initially looked like a sharp but contained energy spike is now being treated as a sustained macro shock with broader economic consequences.
But the key changes this week is how markets are interpreting that shock. Where last week was dominated by inflation fears and rising yields, there are now growing signs that investors are shifting their focus toward growth risks. Treasury yields have started to fall again, with the US two-year dropping to around 3.89% as markets cut the probability of further Fed rate hikes to roughly 25%, down from 35% just days earlier. The narrative is evolving from “higher for longer” to whether central banks will even be able to tighten into a weakening backdrop.
That tension is showing up clearly in global bond markets. Shorter-dated yields are declining on growth concerns, while longer-dated yields in more exposed economies continue to rise on inflation risk. In Japan (where over 90% of oil is imported) 30-year yields have climbed to 3.79% and 40-year yields to 4.02%, near recent highs. The divergence reflects a market increasingly caught between two forces: persistent inflation from higher energy costs and mounting risks to global growth.
In other words, this is starting to look more like a classic stagflation setup.
Across asset classes, positioning remains cautious. Equities have struggled to find direction after recent declines, with only a modest bounce in futures, while credit conditions are beginning to show signs of strain. Currency markets are also reacting, with the yen strengthening and policymakers hinting at potential intervention as volatility picks up.
Gold, meanwhile, is beginning to stabilise. After initial selling pressure earlier in the conflict, prices have found support around $4,500, with dip-buying emerging as investors reassess the medium-term backdrop. If inflation remains elevated while growth deteriorates, the case for gold as a hedge becomes increasingly compelling.
Looking ahead, the path of the conflict and particularly the status of the Strait of Hormuz, remains the key variable. Scenarios being discussed range from a near-term resolution to a prolonged disruption that could push oil toward $200 a barrel. The longer the shock persists, the more likely it is that markets move from pricing inflation alone to fully pricing a stagflationary regime.
For now, the message is clear: macro is no longer moving in one direction. Markets are being pulled between inflation and growth and that tension is driving volatility across every asset class.