Investor anxieties surrounding negotiations between the U.S. and Iran paused a rally on Friday, initially sparked by roughly in-line inflation data and the announcement of a two-week ceasefire on Tuesday night. Even so, the S&P 500 capped off its best week since November—despite losing momentum after a seven-day advance—while West Texas Intermediate (WTI) crude oil managed to end the week below $100 a barrel for the first time since late March even as the Strait of Hormuz remained largely closed heading into the weekend.
Oil prices began to reverse their previous decline, however, as negotiations reached a deadlock over the weekend, with Vice President JD Vance stating that the talks failed because Iran would not agree to permanently halt its nuclear weapons development. Following the failure of the talks, President Donald Trump announced a U.S. naval blockade of all Iranian ports and the Strait of Hormuz, set to begin on Monday. WTI crude oil jumped above $101 per barrel, while International Brent rose above $100 a barrel as energy markets digested the impending blockade. The S&P 500 remained little changed in early Monday trading, however, as investors hoped that the U.S. and Iran would eventually reach a deal.
As the geopolitical backdrop remains in a state of uncertainty, last week’s batch of economic data—containing evidence of heightened, stubborn inflation and a drop in consumer sentiment—highlights a delicate balancing act. As we look at the broader economy, we are seeing a juxtaposition of sticky inflation, continued labor market concerns and questions about future economic growth, underscoring a growing dilemma for the Federal Reserve as it attempts to calculate all of these risks in its approach to interest rates.
Front and center last week were two major inflation reports: the February Personal Consumption Expenditures (PCE) Price Index and the March Consumer Price Index (CPI). Overall, the PCE report paints a picture of heightened, persistent inflationary risks that were present even before the overseas conflict escalated in March. Most notably, Core PCE—the U.S. Central Bank’s preferred measure of inflation—held stubbornly at 0.4 percent for a second consecutive month. This places the year-over-year measure at 3 percent, remaining above the Fed’s 2 percent target. In fact, we haven't seen overall progress toward that 2 percent goal since inflation first hit 3.1 percent in December 2023.
The March CPI report, issued later in the week, showed a month-over-month increase of 0.9 percent, induced by the recent energy shock. Core inflation, however, only rose by a tepid 0.2 percent, while services inflation pulled back to its lowest on a year-over-year basis since March 2021. While this comes a positive development in an overall better than expected report, there are still signs that inflation pressures remain. For example, supercore services (excluding shelter), a reading the Fed uses to gauge future services inflation, increased by just 0.18 percent in March. This follows steeper gains in the supercore category over the past few months, which, when combined with the most recent reading, show likely upward service-sector pressures ahead.
Additionally, the Institute for Supply Management (ISM) Services Index, released last week, showed a spike in prices paid by service firms to 70.7, the highest level reached since October 2022. This has a correlation with service-sector inflation and points to likely continued inflation pressures in the coming months, especially when combined with the ISM manufacturing index released the week prior, which showed prices paid by manufacturing firms spiking to the highest level since June 2022. Once again, the Fed finds itself in a challenging position. It must determine whether the recent conflict is causing a transitory surge in energy prices that will subside or if it will leak into core inflation and permanently alter consumer expectations. The risk here is that if consumers and corporations expect inflation to be permanent, their actions could create a self-fulfilling prophecy, much like the economic environment of 1966–1982. Often referred to as the Great Inflation, rising inflation expectations during this period led people to act in ways that guaranteed higher prices, from wage–price spirals to feeble attempts by consumers to front-run inflation, a surge in demand that only pushed prices higher.
Minutes from the U.S. central bank’s March 18 meeting reflect a committee carefully weighing these risks. While they are inclined to keep rates on hold, the vast majority of monetary policymakers noted that progress toward their inflation target could be slower than expected. Some participants even see a strong case for discussing potential rate hikes, especially since staff forecasts don’t show inflation approaching the Fed’s 2 percent target until the end of 2027.
While the future path of inflation remains uncertain, fears surrounding elevated prices have clearly begun to weigh on consumer confidence, potentially impacting individuals’ spending habits. The University of Michigan Sentiment Survey saw a sharp deterioration in its preliminary April reading, with the overall sentiment index pulled back to 47.6, the lowest reading in the history of the index dating back to January 1978. This drop was all-encompassing, spanning across all political affiliations, income levels and age demographics. The pullback was driven by a number of factors:
- A jump in intermediate- to long-term (five- to 10-year) inflation expectations to 3.4 percent
- Consumers’ perceptions of their current financial situations, falling to the worst levels since 2009
- A drop in the outlook for business conditions to the lowest level since mid-2022
- Growing employment concerns, with 68 percent of respondents expecting more unemployment in the next year, up from 58 percent in February and just off the recent peak of 69 percent in November 2025, levels historically consistent with job losses and economic contractions
It’s important to note that 98 percent of these interviews were completed before the April 7 ceasefire announcement, and many respondents explicitly blamed the overseas conflict for their unfavorable economic outlook.
While further developments in the Middle East may shift future consumer expectations, these growing concerns appear to have already leaked into overall economic growth. Last week brought another relatively weak Personal Income and Outlays report from the U.S. Bureau of Economic Analysis, which reflected a meager 0.1 percent rise in real personal consumer spending in February, following no increase in January. As a result, the Atlanta Fed’s GDPNow tracker slipped to an estimated 1.3 percent for Q1, down from an expected 3 percent earlier in the quarter. This would be a disappointing result after a slim 0.5 percent advance in the final quarter of 2025, especially considering that deferred government consumption (following the 43-day government shutdown) and tax refunds from the One Big Beautiful Bill Act were expected to add a significant boost to Q1 growth.
Looking ahead to this week, the market’s focus has shifted to corporate earnings, starting with the major banks. While the economy is showing mixed signals, investors have taken comfort in strong earnings forecasts for 2026 that have withstood spikes in oil prices or broader economic concerns. Because analysts are often slow to adjust their expectations, executive commentary in the coming weeks will be crucial in validating how businesses are truly navigating higher inflation and energy costs.
Much will be determined in the coming weeks regarding the geopolitical landscape and its impact on economic growth. While the U.S. economy appears to remain resilient, elevated oil prices and global tensions present risks. However, when it comes to your financial security, it is vital to remember that the events of the coming weeks are just a small chapter in a much longer story.
The most effective way to navigate periods of uncertainty is to remain invested, keep your portfolio well diversified and stay focused on the long-term goals we’ve established together. By viewing these market movements through the lens of your comprehensive financial plan, you can feel confident and prepared for whatever the market brings next.
Wall Street wrap
PCE inflation remained sticky even before Middle East Conflict: This week brought another important piece of the economic puzzle with the release of the February PCE Price Index, the Fed’s preferred measure of inflation. The data shows that inflation remained stubbornly high in February 2026, holding well above the Fed’s 2 percent target even before the significant energy price spikes caused by geopolitical unrest in the Middle East.
- Headline PCE rose by 0.4 percent month over month, a slight acceleration from last month’s 0.3 percent. However, the year-over-year (YoY) rate held steady at 2.8 percent, matching last month’s figure.
- Core PCE, which includes more volatile food and energy prices, rose 0.4 percent for the month, matching the previous month’s pace. The YoY core rate cooled slightly to 3 percent, down from 3.1 percent last month. However, this is the same pace at which we ended 2023 and have remained stuck near since. Importantly, the last time core inflation was at the Fed’s target was five years ago (in February 2021), a reality that highlights the growing risk of inflation becoming an embedded in the U.S. economy.
CPI inflation spiked in March amid energy shock: The latest CPI report, released by the Bureau of Labor Statistics (BLS) on Friday, April 10, showed a significant spike in inflation in March, primarily driven by soaring energy costs linked to the ongoing war with Iran.
- Headline CPI rose by 0.9 percent for the month, bringing the YoY increase to 3.3 percent. As previously mentioned, this jump was heavily influenced by volatile energy costs.
- Core inflation, which excludes food and energy, provided some relief, rising a modest 0.2 percent for the month and bringing the YoY rate to 2.6 percent.
- “Supercore” services inflation, which excludes shelter and energy to help the Fed evaluate inflation outside the current energy shock, rose a more modest 0.18 percent this month. However, because this follows three previously heightened readings, the three-month annualized pace for supercore inflation now sits at an elevated 4.57 percent.
Services continue to expand despite stubborn inflation: The latest ISM Services Purchasing Managers’ Index (PMI), which offers a look into the health of the U.S. service sector, highlights a delicate balance between persistent inflation pressures and a potentially softening labor market. Key takeaways include these:
- Headline PMI cooled slightly to 54.9, down from 56.1 the previous month. While this represents a slower pace of growth, any reading above 50 still indicates that the service sector is expanding.
- In a highly positive sign for future business activity, the New Orders index jumped to 60.6 from 58.6. This is the highest level recorded since February 2023, suggesting that underlying demand remains robust.
- Highlighting ongoing inflationary pressures, the Prices Paid index rose sharply to 70.7 from 63. This marks the highest level since October 2022, a period when U.S. inflation was starting to pull back from its post-COVID peak in June through September 2022. Historically, elevated readings in this specific metric have a correlation with future inflation trends.
- At the opposite end of the spectrum, the employment index experienced a sharp decline, falling to 45.2. This drop comes after a brief three-month period of expansion (including a 51.8 reading in February) that followed six months of contraction. A reading of 45.2 is the lowest seen since December 2023 and, prior to that, July 2020.
The week ahead
Monday: Existing home sales data for March 2026 will be published by the National Association of Realtors at 10:00 a.m. EST. Last month’s sales are projected to reach a seasonally adjusted annual rate of 4.05 million. This sector has been softening since it peaked at 6.43 million in January 2022, just before the Fed initiated its rate-hiking cycle. Mortgage rates have ticked up once again in the aftermath of the Middle East conflict, and we will be looking to see how it has impacted the housing market.
Tuesday: The BLS is scheduled to publish the March Producer Price Index (PPI) report at 8:30 a.m. EST. February’s PPI data showed wholesale prices continuing to navigate the complex balance of cooling goods and sticky services. Following the energy-driven jump of this week’s CPI report, we will be watching the PPI closely to see if those higher energy costs are also pressuring producers, which could eventually pass through to consumers.
Tuesday will also bring the National Federation of Independent Business Small Business Economic Trends report for March 2026 at 6:00 a.m. EST, offering insights into how small businesses are navigating current macro conditions. While this reading has shown slight signs of improvement after remaining below its 52-week historical average from December 2021 through November 2024, the latest forecasts suggest a slight pullback this month to 97.9, placing it just under that long-term benchmark.
Wednesday: The Fed is scheduled to release the Beige Book at 2:00 p.m. EST ahead of its April 28–29 Federal Open Market Committee meeting, containing key insights on employment and inflation as well as the impact of tariffs on the U.S. economy.
Thursday: The U.S. Department of Labor will release its weekly initial jobless claims report at 8:30 a.m. ET. This weekly data point will be scrutinized for any real-time signs of softening in the labor market.
Friday: The Fed will release its latest batch of industrial production at 9:15 a.m. EST, including important insights into manufacturing activity, which has recently improved but remains below its March 2022 high (the month the Fed started rising rates). This is another interest rate-sensitive segment that has been harmed by higher rates but has shown signs of improvement amid recent Fed cuts. We will be watching to see what impact the Middle East conflict has had on manufacturing output.
Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.
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Brent Schutte, CFA® Chief Investment Officer
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