The biggest surprise from the Iran war is turning out to be the best news for interest rates.
Oil prices (WTI) fell below $70 per barrel this morning, only $3 above the pre-war price of $67.
The biggest surprise from the Iran war is the fact that oil prices did not shoot above $150 per barrel, like many analysts predicted.
Thank God that did not happen, as it would have sparked significant inflation fears, pushed rates way higher, and crushed the world economy.
Prior to the Iran war, oil prices were around $67 per barrel (as I mentioned above), and the average mortgage rate was 5.99%.
After the war started, oil prices peaked at $126, and mortgage rates peaked near 6.75% – showing us exactly how much oil prices influence interest rates.
Oil prices did not spike higher because producers found alternative routes around the Strait of Hormuz, the U.S. was able to export more and help sneak some oil through the Strait, countries were able to rely on reserves, China turned out to have far more reserves than the analysts thought, and China was able to tap into alternative energy sources (China’s resilience was the biggest surprise of all).
The other “surprise” was how quickly oil prices fell recently, even though we were told it would take months for many idle producers to get production back online (because, as we heard over and over, “you can’t just flip a switch to fire up a rig”).
So – does this mean rates will continue to fall as more oil supply floods the market (like Doomberg predicts) and prices fall further? Maybe, but don’t hold your breath.
On Saturday’s Julia La Roche podcast, renowned banking analyst, Chris Whalen, all but guaranteed listeners that we’ll see double-digit inflation numbers this fall.
This is because so many input costs (energy, fertilizer, foodstuffs) were pushed way higher due to the war in Iran, and those higher input costs will work their way into other prices by fall.
If Whalen is right, those high inflation numbers will spook the bond market for sure – and push rates higher.
Before the Iran war, I predicted that we’d see 5.5% mortgage rates by year end due to falling prices and a softening labor market.
Then a few weeks ago, I said we’d be lucky to see 6.5% mortgage rates by year-end, largely because of Iran war price spikes and a surprisingly strong labor market (thanks largely to AI and data center buildouts).
But now I am predicting that rates will fall somewhere between 5% and 8%. 😊
I am kidding (sort of), as we’re going to see a push and pull between inflationary pressures and deflationary pressures.
Here are the wildcards:
- How fast supply increases. Oil suppliers ramped up supply when prices were high. But now that idle producers are coming back online, we’ll see gluts, per Doomberg. And this will cause prices to plummet. It’s just a matter of when…
- How much demand falls. George Gammon pointed out that industrial silver prices are plummeting too, indicating that demand is likely falling with supply. Falling demand is deflationary – and will bring down rates.
- AI bubble pops. Numerous analysts like Ed Dowd continue to insist that the AI bubble (stock runup, data center buildouts, chip sales, etc.) will soon pop. And when it does, it will be very deflationary, as a lot of liquidity will instantly drain from the market.
- Not the Fed. The Fed will say things and move rates, but the bond market will always speak last – like we’ve seen over the last several days when a “hawkish” Fed was ostensibly going to push rates higher.
Today’s average rate is 6.58%. I will be very happy if we’re still close to that in December.
But the biggest takeaway here is that ANYTHING is possible. See this week, for example.
