Thursday, May 21, 2026

Macro Musings · Daily Briefing · Thursday, May 21, 2026

Gas is up 50% and the new Fed chair thinks inflation is like a war you can deter, so that's going well

Red Sea volumes down 40-60% below prior highs. The ongoing Iran war has triggered a historic oil supply shock—draining U.S. and global inventories, spiking gasoline prices over 50%, and raising inflation fears that are pushing bond yields higher and complicating Fed policy.

Personal Stakes · Est. read time 5 min

In 30 seconds: The ongoing Iran war has triggered a historic oil supply shock—draining U.S. and global inventories, spiking gasoline prices over 50%, and raising inflation fears that are pushing bond yields higher and complicating Fed policy. A wave of mixed U.S. economic data showed resilient labor markets and strong manufacturing PMIs alongside a sharp Philadelphia Fed plunge, while Q1 2026 earnings season wrapped up with notable results from Nvidia, Intuit, and others. Analysts debated whether U.S. real interest rates are deeply negative or at cycle highs depending on inflation measurement, with broader concerns about fiscal dominance, unsustainable debt levels, and central banks rotating from Treasuries into gold. Kevin Warsh was sworn in as the 17th Federal Reserve Chair, replacing Jerome Powell, just as futures markets shifted to pricing an 84% probability of a rate hike by year-end amid persistent oil-driven inflation.

The numbers tell a straightforward story about what happens when a major chokepoint closes. US refined product inventories have fallen 47 million barrels since the war with Iran began, declining in 10 of the past 11 weeks. In a normal year, inventories over the same window would have risen by 3 million barrels. The average gasoline price has sat at $4.50 per gallon for much of May, up over 50% since the conflict started. National average gas hit a post-war high yesterday. Even the head of ADNOC says full oil flows through the Strait of Hormuz will not return before the first or second quarter of 2027, even if the Middle East conflict ended now. Chinese crude imports have dropped ~40%, but the data point to massive Chinese SPR releases rather than true demand destruction. Beijing's oil consumption is running at roughly a quarter of pre-war levels, a reduction increasingly difficult to explain with available data. Meanwhile Malawi has run out of strategic oil reserves. The bond market noticed. The 10-year yield soared above 4.5% last Friday. ETH is inversely correlated to oil because higher oil pushes up inflation, and the April FOMC minutes spoke of the need for 'policy firming' if inflation persists above 2%, meaning higher oil equals higher probability of Fed hikes.

The economy keeps sending two telegrams at once, and they contradict each other. Start with manufacturing. The S&P Global U.S. Manufacturing PMI came in at 55.3 in May, while the Services PMI registered 50.9 and the Composite PMI landed at 51.7. Kansas City Fed Manufacturing Index: 8. KC Fed prices paid hit 63 — the kind of number that makes inflation-watchers nervous. The Philadelphia Fed Manufacturing Index came in at 0.4 in May — barely positive — with new orders at 1.7 and employment at 2.8. Prices paid registered 47.9. Manufacturers are upbeat about the outlook even as current conditions remain mixed — the Philadelphia Fed outlook index surged to a fresh high of 53.2. The labor market remains stubbornly healthy. Initial jobless claims fell to 209,000 for the week ended May 16, 2026, down from 212,000 the prior week. Continuing claims held at 1.782 million. Intuit announced it will cut 17% of its workforce. Housing offered its own split screen: April housing starts slipped 2.8% month-over-month, but April building permits jumped 5.8%. The MBA Mortgage Purchase Index dropped 4.1% for the week ended May 15 as the 30-year mortgage rate rose 10 basis points to 6.56%, its highest since March. Earnings season delivered with flair. NVIDIA reported its third consecutive triple play and 19th since 2020. EnerSys reported its first triple play since 2018. NIO reported its second straight triple play this morning after several years of poor results versus expectations. Atlanta Fed GDPNow 2Q2026 real GDP estimate up 4.3% latest vs. prior read.

The question of whether US real interest rates are positive or negative turns out to depend on which inflation number you trust. Real yields are supposed to be the yield you get from investing in nominal bonds minus the inflation you experience while holding them, which reduces your real purchasing power. Simple enough. TIPs pay CPI and the government changes the rules of what CPI measures over time. Meanwhile, survey-based alternatives have their own problems. The UofM mean survey inflation measure has some nutcases impacting the survey who fit on the fringe, the 3-month realized measure is highly volatile and noisy, and the 3-year look-back measure is highly trending. Pick your poison. The fiscal arithmetic underneath this debate is stark. The debt is expanding; the deficit is not shrinking. It is the rate of change of the debt expanding that matters. The deeper claim is about what the government actually owes. The US government does not owe baby boomers trillions of dollars, they owe them hips, knees, pharmaceuticals. This is functionally debt in a hard currency the US government cannot print. That hard currency liability that is entitlement is entirely off balance sheet. We can guarantee Entitlements as far out and in any amount you want - we just cannot guarantee their purchasing power. Central banks appear to have noticed. Global central banks have switched back to gold from USTs, driving gold above USTs in foreign reserves. In Q3 2014, China reopened the gold window with Russia's help (via CNY oil) without Washington's permission. A mix of debt, inflation, and populism has changed the bond market interest rate landscape since 2020. Daily CNY trade volume hit a record CNY 1.22 trillion per day in April. Gold closed at $4,542.20, up 0.24% on the day. In fiscal dominance, USTs are risk-free nominally but only 'risk-free' on a real basis, and CBs have turned to gold and away from USTs.

The transition marks a clean break in style if not in mandate. Jerome Powell does not vanish entirely; he returns as a voting Fed governor, a historic first. A former chair sitting on the board as a regular governor, potentially outvoted by his own successor — that is a workplace dynamic most people would find uncomfortable. Powell's tenure lasted eight-plus years. The Dow posted a 9.0% compound annual growth rate under his leadership, ranking 8th among Fed chairs. The total return clocked in at 96.0%, good enough for the top five all-time. Dow total return under Powell: 96.0%. Whether you credit the chair or the circumstances is, as always, a matter of taste. The circumstances greeting the incoming Fed Chair are not gentle. The SOFR curve is now pricing in a rate hike instead of three rate cuts, a full reversal from consensus at the start of the year. Fed funds futures assign an 84% probability of a rate hike before year end. The new Fed Chair has a theory about this: "We can avoid wars if we're prepared for one. Same thing is true with inflation." The philosophy: deter inflation the way you deter war. By being so credible you never have to fight. It is a tidy metaphor. The question is whether markets find the new chair credible enough that the deterrent holds, or whether he actually has to fire.

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