— Scott B. MacDonald, Ph.D.
Summary: In the week ahead the key narratives for investors and markets are understanding the Iran war’s economic impact; looking for the emergence of any new “cockroaches” in the private credit market; and discerning how the Fed reaches a decision at its FOMC meeting on March 17-18. Risks have increased for all debt markets, despite the new issue pipeline for corporates, sovereigns and municipal bonds is full. In the US, the impact of war is most evident at the gas pump and is creeping into airline tickets. Food and transport costs could follow. This feeds into negative sentiment in markets, increasing chances for a deeper selloff in equity and debt markets, especially for more high-risk assets.
Headlines – At home
The Iran war and the states – pain at the pump. The Iran war is having an impact on the US economy. Some states are already feeling the pressure more than others. In this, rising gasoline prices loom large. According to data from the American Automobile Association (AAA), over the past two weeks prices at the pump have leaped by more than 60 cents. Indeed, the national average gas price as of March 15, 2026, was $3.70 per gallon. It was $2.81 in early January 2026.
State Gas Price Averages as of March 15, 2026 ($ per gallon)
| Highest | $ per gallon | Lowest | $ per gallon |
| California | $5.51 | North Dakota | $3.18 |
| Hawaii | $4.94 | Oklahoma | $3.22 |
| Washington State | $4.89 | Missouri | $3.22 |
| Nevada | $4.48 | South Dakota | $3.26 |
| Oregon | $4.46 | Mississippi | $3.32 |
Source: https://gasprices.aaa.com/state-gas-price-averages/.
California stands out. The US Energy Information Administration (EIA) notes that the Golden State’s gasoline prices are usually a dollar higher than any other state in the continental US due to state taxes and fees, environmental requirements (that are pushing the closure of refineries), special fuel requirements, and isolated petroleum markets (no inter-state connecting pipelines). The Jones Act also stipulates that goods cannot be shipped from other states unless it comes via a US-made or US-charted ship, which is usually more expensive. This has left the Golden State meeting most of its fuel needs from Asia: Middle Eastern oil is refined and/or blended in India and South Korea or the Bahamas (refined oil is sent from the US Gulf states) and reexported to the Golden State.
Californians are likely to be grumpier in the days ahead. According to energy economist Philip Verleger, “The US West Coast will become the poster child for the consequences of the attacks on Iran.” He also noted that California drivers can expect gasoline and diesel shortages and prices possibly above unprecedented levels of $10 per gallon.
Power generation costs, already on the rise, could also see additional pressure. While the US is net exporter of natural gas and that commodity is the main fuel stock (40% of the total) for electric power generation, international supply concerns could put pressure on global supplies and prices. Several states have already seen substantial electricity price increases, which could continue in the months ahead. Among these states are Pennsylvania, Rhode Island, New Jersey, Maine, Ohio, Maryland, California and New York. Beyond the external risk factor the key vulnerability factors include aging infrastructure; rising demand from data centers (most significant in Texas, Virginia and Georgia); and extreme weather (in the southeastern states).
Fertilizers are another problem related to the Iran war as the Gulf States are a critical link in the fertilizer supply chain. This impacts US states that are heavily oriented towards agricultural production. Spring planting season could be complicated by higher fertilizer prices, hitting agricultural producers who are already whipsawed by tariff tensions. The closure of the Strait of Hormuz will be felt by key food producing states, including California, Iowa, Nebraska, Kansas, Texas, and Illinois.
Fertilizer Commodities and the Persian Gulf State Exports
| Commodity | Gulf Share of World Production | Main Regional Exporters | Uses |
| Ammonia & urea | 34%-45% | Bahrain, Iran, Kuwait, Oman, Qatar, Saudi Arabia, UAE | Fertilizer (and basic chemical input) |
| Sulfur | 21.6% | Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, UAE | Fertilizer (and mining and metals processing and uranium extraction) |
| Phosphate | 3.9% | Saudi Arabia | Fertilizer |
Source: https://www.energypolicy.columbia.edu/us-israeli-attacks-on-iran-and-global-energy-impacts/.
What does Smith’s think? Wars always have unintended consequences. The Iran conflict is no exception. The closure of the Strait of Hormuz underscores the key role played by the Persian Gulf states in the global economy. While we have mentioned oil, gas and fertilizer inputs, there is likely to be price pressure on methanol (fuel and basic chemical input), polyethylene (packaging, pipes, bottles, and electrical insulation), polypropylene (packaging, automotive manufacturing, and consumer goods), and aluminum (key industrial metal). All of these play a role in the US national and state economies. Moreover, they are likely to feed into concerns over affordability, with an eye to the November mid-term elections. Look to the Trump administration to define victory more clearly in Iran, with a reference to having attainable objectives (even if the theocratic regime vows to fight on). While Iran’s nuclear weapon programs represent a threat to US national security, higher prices at the gas pump may be bigger risk to the Republicans’ maintaining their hold on Congress, hence the Trump administration’s push to end the war faster.
The Fed – conflicting signals. The Fed is not in a good place. The Iran war is complicating an already messy policymaking landscape. On one side of the equation, US real GDP missed expectations of 1.4% growth in Q4, 2025, instead coming in at a flaccid 0.7%. Consumer spending was flat in February. On the other side of the equation, the Fed’s preferred inflation gauge (core PCE) remained sticky at 3.1%. Inflation stood at 2.5%, still above the Fed’s 2.0% target. There are also concerns over the firmness of the low-hire, low-fire labor market at a time when many Americans feel squeezed by energy, grocery, shelter and health care bills. Talk of stagflation is increasing.
What does Smith’s think? We expect the fed will keep interest rates steady at 3.5%-3.75%. Our reasoning is that even though the economy slowed in Q4, labor markets are not in full retreat and the potential for higher inflation due to the war is likely to leave the FOMC in a neutral position. Consequently, what Chairman Powell says or does not say about the impact of the Iran war on inflation is likely to be the main attraction. We stick to our view of one rate cut for the year. That said, we admit that there is much that unclear: Chairman Powell is scheduled to end his tenure at the helm in May, turning over the Fed to Kavin Warsh, who favors lower rates. But Warsh’s appointment could be held up in the Senate. This due to resistance among key Republicans to the Trump administration’s investigation of Powell over allegations that he lied to Congress regarding ballooning costs of a $2.5 billion renovation of the Fed’s headquarters. A lot of fog hangs over the Fed, which feeds into the general sense of uncertainty.
Headlines – Abroad
Global debt: going up. The OECD, often referred to as the club of advanced economies, released its Global Debt Report 2026. It is worth a look. Several points stand out. Central government debt borrowing in OECD countries reached $17 trillion in 2025, 17% higher than in 2024. Corporate borrowing from markets also rose, reaching $6.8 trillion. Total debt issuance was up 23.1% over the year prior. Those numbers are expected to climb in 2026 to $29 trillion. Of that, expected corporate bond issuance by nine major AI players is forecast at $1.2 trillion.
What does Smith’s think? While debt markets, including those for municipal bonds, have been resilient thus far, markets are stretched. Many governments have little inclination to take the painful measures to trim fiscal deficits and national debt. The OECD report also points out that as the cost of long-term borrowing has risen, there has been a shift in issuance towards shorter-term maturities, which “increases refinancing risks.” Moreover, the increasing role of more sensitive investors “may make debt markets more vulnerable to shocks.” Add in geopolitical tensions, trade disputes, and AI disruption, there could be problems in global debt markets in 2026, something which is being ignored.
Canada and Mexico-US. In 2020 the USCMA replaced NAFTA, with President Trump declaring that the new agreement was the “greatest deal ever.” Now, the US, Canada and Mexico are beginning their review of the USMCA trade with formal talks in July. Relations between the three countries are strained, with President Trump indicating that he might let it expire or opt for separate bilateral deals with Canada and Mexico. Although this casts a shadow over the USMCA, we think it will be renewed but with enough changes that advantage the US, as President Trump regards such matters as zero sum contests and it will be hard for Canada and Mexico to walk away from their largest trade partner.
