Global Insights Center: Monthly Newsletter

As we reflect on last month’s economic and geopolitical environment, the conflict in the Middle East continues to dominate headlines. Throughout the conflict, Iran has continued to attack neighboring nations in the Persian Gulf, as well as Israel, while also targeting and threatening vessels traveling through the Strait of Hormuz. And while the number of missiles Iran is launching at nations has declined, the number of drones they’re using in the conflict remains elevated, with a roughly 10:1 drone-to-missile ratio. The purpose of these actions is largely to curtail shipping traffic, namely vessels carrying energy products.

 

Iran’s strategy appears to focus on enacting strategic and economic challenges for nations in the region, and the world more broadly. This is considered a pressure tactic on the West  through rising energy prices as well as restrictions on access to energy. For example, Brent oil is up ~40% since before the conflict, West Texas Intermediate is up less at ~30% (it is mostly sourced from the U.S. and Canada), and natural gas in Asia is up ~130%, while natural gas extracted and used in the U.S. has barely changed. This highlights how price changes vary based on where the product is sourced and used. Relatedly, South Asian markets are starting to face shortages in liquefied petroleum gas (LPG) (a product that is mostly used for cooking).

 

In recent days, Israel targeted the South Pars natural gas field in Iran, which is vital to Iran’s natural gas needs. Iran sources most of its natural gas domestically; 70% comes from South Pars, and 90% of Iran’s electricity is derived from natural gas. Accordingly, attacking South Pars has the potential to impact Iran’s electrical grid and overall economy.

 

In retaliation, Iran struck the Ras Laffan liquefied natural gas (LNG) facility in Qatar. Ras Laffan accounts for around 20% of the world’s LNG supply, and Qatari LNG is mostly exported to Asia. Damage to infrastructure could result in a longer-term impact on LNG access for Asian markets, even after the Strait of Hormuz sees normalization.

 

Meanwhile, the Kurdish invasion of Iran has not yet occurred. Earlier in the conflict, there were indications of a potential for Kurdish fighters based in Iraq to overthrow the Iranian regime. We were previously skeptical about the viability of a Kurdish uprising due to limitations in their capabilities, and questions about whether Iran’s  broader Persian population would accept a Kurdish takeover of the government.

 

Separately, Saudi Arabia has thus far held off on retaliating against Iran despite numerous inbound projectiles. However, its leadership is suggesting that could change. If Saudi Arabia does enter, Pakistan may then also join alongside Riyadh per the mutual defense pact both nations signed last year. When that deal was secured, we noted questions about whether Saudi Arabia would come to fight alongside Pakistan if a future India–Pakistan conflict emerges given that Saudi Arabia and India maintain very close diplomatic and economic ties. Instead, we are now wondering whether Pakistan would enter the conflict alongside Saudi Arabia should Riyadh counterstrike, especially as Pakistan-Afghanistan border challenges continue to escalate.

 

Some of Iran’s proxies have also been activated amid this conflict, namely Hezbollah in Lebanon, which has been attacking Israel. In response, Israel has mobilized troops into Lebanon. It is interesting to note though that the Houthis in Yemen (another Iranian proxy) have not yet gotten involved. It’s possible that they are waiting to preserve their munitions and potentially enter at a future point if the conflict extends.

 

On the economic front, the U.S. economy lost -92,000 jobs in February, while the unemployment rate moved up to 4.4%, and wage inflation also moved higher to 3.8%. This largely comports with our view that labor markets are softening. Though, it is better to observe labor trends on a broad basis, as month-to-month data can be choppy.

 

Consumer inflation (CPI) was unchanged in February at 2.4% year over year (YoY). Food inflation was elevated at 3.1%, goods inflation stood at 1.0% (manageable but above trend), and energy inflation was 0.5%, which could rise further given the conflict in Iran.

 

Best,