Markets Are Cheering a Cooler-Than-Expected PPI. Are the Iran War Risks Overblown?

Since the Iran war broke out over a month ago, the biggest risk to global markets has been that inflation will cause a recession.

Oil prices have spiked from the war, and the Strait of Hormuz is a key passageway for the world's fertilizer, meaning that food prices could soar as well. With the rise in oil prices, shipping and travel costs are going up, which is expected to raise retail prices.

Investors follow the Consumer Price Index (CPI) closely to monitor inflation, but the Producer Price Index (PPI), which tracks wholesale prices, tends to be a leading indicator for consumer prices, so it's worth monitoring as well.

The March PPI accelerated from February on an annual basis, but not as quickly as economists had expected, helping to send stocks higher again on Tuesday.

Wholesale prices rose 4% from a year ago, but just 0.5% for the month, which was significantly cooler than the consensus estimate at 1.1%.

Core inflation, which strips out the effect of food and energy, was up 3.6% for the year, and just 0.2% for the month. Energy drove the increase, up 8.5% for the month.

Overall, the report helped cool off fears of an energy crisis, which contributed to the risk-on mood on Wall Street.

Image source: Getty Images.

Tensions calm in the Middle East

In addition to the favorable PPI report, investors responded to signs that temperatures were coming down around the Iran conflict. President Trump encouraged further talks with Iran, and with one week remaining in the two-week ceasefire, investors seem to be betting that the pause in fighting will be extended.

Oil prices fell 6%, with a barrel of Brent crude dipping below $93, a response to optimism for a long-term peace agreement as President Trump, despite initiating a blockade of the Strait of Hormuz yesterday, has refrained from threats to restart military attacks when the ceasefire expires.

What it means for investors

The situation in Iran remains fluid, and investors should expect volatility to continue, at least until the Strait is fully reopened and there's a lasting peace agreement.

However, it's beginning to be clear that investors believe the worst of the conflict is behind them. In fact, the S&P 500 (SNPINDEX: ^GSPC) is now higher than it was before the war broke out, showing investor optimism has returned.

As attention turns away from the war and back to narratives like AI, the broad-market index could move higher.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.