What Happened
The U.S.-Iran war has crossed into its second month with no credible off-ramp visible. This is no longer an acute shock requiring a hedge, it is a sustained geopolitical regime that must be priced as a baseline condition, not a tail risk premium.
What Our Data Says
The numbers leave no ambiguity about the transmission channel. Brent is at $121.88, up 27.3% over one month, the most extreme single-month commodity move in our entire dataset. WTI at $111.54 is the mechanical floor for energy producer margin expansion, and with the FRED lag print still at $104.69 (March 30, six days stale), the real-time situation is already worse than official series reflect. StL Financial Stress is up 57% month-over-month, even as net liquidity remains technically expansionary, proof that energy-driven real income destruction is outrunning any balance sheet support the Fed can theoretically provide. Consumer sentiment at 56.6 is approaching the 50-level that historically demarcates recession psychology from mere pessimism. The quit rate at 1.9% confirms labor market softening is underway. High-yield spreads at 317bp (BAMLH0A0HYM2, April 2) and IG at 86bp remain surprisingly compressed, this is the market's last area of denial, and it is fragile.
The Hormuz closure scenario, previously assigned a 15% probability, must now be treated as a persistent, not episodic, risk. Every day of active hostilities in month two is a day that 20% of global seaborne oil transits under kinetic threat. The non-linear case (WTI $140–165, Brent $180–200, CPI toward 5–7% within 60 days) is not a tail anymore; it is the left tail of a distribution whose center has shifted dramatically rightward.
What This Means
The Fed's trap just got deeper. At Brent $121.88, our base-case CPI trajectory of 3.5–4.0% is almost certainly the floor, not the ceiling. A second month of war means supply chain actors are no longer managing an acute disruption, they are repricing structural cost bases. That repricing shows up in PPI first, then CPI with a 6–8 week lag, then in wage demands as real purchasing power collapses. The breakeven at 2.36% (+2bp week-over-week) is still dramatically undershooting reality, which means bond markets have not yet fully capitulated to the new regime. The 10Y at 4.31% will face upward pressure as the April 10 CPI print crystallizes what month two of sustained energy shock means for the forward path.
Gold at $4,679.7 is the one asset whose TIPS-implied fair value of $3,500–4,000 understates rather than overstates fundamental worth right now. The $700–1,200 premium the quant frameworks flag as expensive is in fact Hormuz tail option value, and with month two of active conflict, that optionality is not decaying, it is compounding.
Positioning Implications
LONG XLE / SHORT XLU remains the highest-conviction expression, WTI at $111.54 mechanically widens producer margins while utilities face simultaneous input cost pressure and rate headwinds. SHORT IYR holds as real yields at 1.97% accelerate. The single most important thing to watch in the next 72 hours: any OPEC+ emergency supply response announcement. A coordinated release from Saudi Arabia and UAE reserves is the only near-term event that credibly breaks the Brent $115+ floor, absent that, every day of continued hostilities is a day the stagflation regime deepens and the Fed's already-narrow policy corridor narrows further.
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