Oily payrolls
Substack Post Week March 02-06
The dominant macro narrative this week has centered on inflation fears after oil surged sharply. That interpretation is almost certainly wrong. Across multiple markets, from Treasuries, inflation breakevens, currencies, and commodities, the signals point to something very different: oil is acting as a demand shock hitting an already fragile financial system.
Over the past several days, crude and gasoline prices have surged dramatically. WTI approached $78 while wholesale gasoline jumped nearly 23% in only two days. At the same time, the oil futures curve moved into extreme backwardation. The spread between front-month and three-month contracts exploded from roughly $0.50 to more than $13, the steepest shift since the 2022 energy crisis. Such curve distortions basically confirms there is a panic to secure immediate physical supply.
The immediate trigger was geopolitical tension surrounding Iran and the Strait of Hormuz. Reports that insurers refused to cover tankers moving through the region forced shipping cancellations and a scramble among importers to secure alternative cargoes. Asian buyers in particular rushed to lock in supply, bidding aggressively for near-term deliveries. But the reaction across financial markets suggests investors are interpreting this shock very differently from policymakers.
If markets believed the oil spike would generate sustained inflation, TIPS would have moved sharply higher. They did not. Five-year breakeven inflation rates barely budged even as gasoline prices surged. That divergence is critical. It suggests investors view higher oil primarily as a growth shock rather than an inflationary impulse. And history strongly supports this interpretation. Major oil shocks, from the 1973 embargo to the 1990 Gulf crisis, did not produce persistent inflation. Instead they reduced consumption, squeezed corporate margins, and ultimately contributed to recessions. Even more recent spikes in 2008, 2011, and 2022 generated only temporary increases in consumer prices before growth slowed and energy markets normalized.
The reason is straightforward: energy costs function like a tax on economic activity. When oil prices rise suddenly, households must spend more on gasoline and heating, leaving less income for discretionary consumption. Businesses face higher transportation and input costs, compressing margins and forcing adjustments elsewhere. In complicated economic environments, as we have today, these pressures can quickly translate into layoffs and reduced investment. This dynamic appears particularly relevant today because so many indicators suggest the global economy was already weakening before the latest oil shock.
