Weekly Newsletter March 23rd to March 27th
RECAPPING LAST WEEK
U.S. equity indices sold off sharply at week’s end amid little tangible progress toward ending the war in Iran. The Nasdaq Composite index lost more than 3% while the S&P500 slid 2%. The Russell 2000 fared better, rising marginally. Oil prices continued to drive the narrative: after plunging Monday on hopes for negotiations and de-escalation in the Middle East, crude and Brent futures steadily clawed back losses to finish higher for the week. U.S. sector performance was mixed, with sharp gains in energy (+5%) and basic materials (+4%) offset by weakness in technology (-4%) and communications (-4.5%). The latter were dragged down after Meta and Alphabet were found liable for social media addiction in two separate trials. Rising energy costs pushed the inflation narrative, sending U.S. Treasury yields to eight-month highs. The 10-year note yield jumped as high as 4.48%, up nearly 50 basis points in this month alone. Relatively poor demand at a trio of short- to intermediate-term Treasury auctions also pressured bond prices and contributed to the rise in yields. U.S. mortgage rates rose for a third straight week, with the 30- year contract lifting to 6.43%. Despite President Trump extending the deadline for Iran to reopen the Strait of Hormuz to April 6 and unconfirmed reports of talks between the countries, investors were skeptical and the Cboe Volatility index (VIX) spiked back above 30. Federal Reserve officials expressed growing concern over the economic outlook and inflation impacts. Turning to economic data, the costs of war started to become evident in this month’s S&P Global Flash PMI surveys. U.S. business activity stayed in expansion territory but slowed to an 11-month low, while prices paid for inputs and output prices charged to consumers both rose. U.S. import prices increased 0.5% MoM in February, the largest jump in nearly four years. The final reading of consumer sentiment for March dropped to 53.3 and one-year inflation expectations rose to 3.8% from 3.4% in the initial estimate. Overseas, private sector growth in the UK and Eurozone stalled this month as manufacturers’ input costs surged, leading them to raise prices at the fastest pace in nearly a year. ECB President Lagarde warned that the central bank could respond “forcefully” should inflation appear likely to persist above the 2% target for an extended period. The Bank of Japan released a new measure of its core consumer price index that showed a 2.2% YoY rise in February. Minutes from the central bank’s January meeting revealed a hawkish bias even before the Iran war jolted oil prices. Finally, China started multiple investigations into U.S. trade practices in response to similar inquiries initiated by the U.S. earlier this month.
THE WEEK AHEAD
A rough first quarter draws to a close this week, with the S&P500 down about 7% thus far. Disruptions from artificial intelligence and concerns about the private credit markets, on top of the Iran conflict, have rattled investors after three straight years of solid gains. March’s non-farm payrolls will be released on Good Friday even as U.S. markets are closed for the holiday. Expectations are for a rebound of 50,000 jobs created after the prior month’s shocking decline of 92,000. Even if the labor market deteriorates further, surging energy prices have shifted the Fed’s focus from employment towards re-emerging inflation pressures. Fed funds futures are no longer pricing in any rate cuts this year and suggest a modest chance of a hike. The JOLTS job openings, Challenger job cuts, and ADP private payrolls reports will be released earlier in the week. Other data points on the domestic calendar include ISM manufacturing PMI, retail sales, and consumer confidence. On the international side, central banks in Europe and the UK may be forced to raise rates several times this year to fight energy price shocks, given that they are highly dependent on oil and gas exports from the Middle East. Germany and the wider Eurozone will release February’s pre-war inflation data early in the week. Japan, another country very reliant on Middle Eastern energy products, reports preliminary March CPI figures from the Tokyo district on Monday evening.
CHART OF THE WEEK
Volatility curve inverts
The Cboe Volatility index (VIX), often referred to as the equity market’s fear or uncertainty gauge, tracks implied volatility on the S&P500 index (SPX) looking out 30 days. There are other volatility indices that track time frames further in the future—three months for example (VIX3M). Typically, the level of VIX3M would be higher than VIX because there is more uncertainty further into the future, but in stressful times the relationship sometimes inverts, as we are seeing now. Since war in Iran began, VIX has spiked above VIX3M multiple times, indicated by the ratio study falling below one in the chart’s lower pane. This typically reflects an influx of near-term hedging demand, not necessarily repricing of prolonged uncertainty. The last three times this occurred—in April, October, and November 2025—and comparing it to the SPX price (purple line in top pane), you can see that this inversion marked an intermediate-term low for equities. Sometimes, though, the inversion can deepen before it reverses, as it did in April when the fear and uncertainty was much stronger than the other instances. With SPX breaking technical support this week, VIX may move to new highs and increase its gap above VIX3M until investors eventually capitulate, forming a bottom from which equity prices could potentially reverse trend.
Source: Charles Schwab Corporation
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