Market dynamics change! For the first time since the Iran conflict: U.S. energy stocks open lower, U.S. bonds and gold "decouple," oil prices

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Source: Wall Street Insights

Oil prices breaking above $100 should normally raise inflation expectations, yet overnight U.S. Treasury yields moved in the opposite direction, falling. Gold surged sharply at one point, while U.S. stock energy shares and broad-market shares declined in sync—JPMorgan Chase believes this signals that “the inflation trade has shifted to the recession trade.” The probability of the Federal Reserve raising rates in 2026 dropped by more than 15 percentage points in a single week. The market then pivoted to pricing in a more moderate rate cut within the year.

The market is sending a rare signal: the inflation trade that has dominated Wall Street for weeks is unraveling, and the recession trade is quietly taking over.

Overnight, U.S. stocks opened higher and then fell back. After the three major stock indexes rose at the open, their gains proved unsustainable. Technology and chip stocks became the biggest drag on the S&P 500, while the energy sector also closed slightly lower. At the same time, WTI crude oil futures rose more than 3% and broke through the $100 level, but Treasury yields fell in the opposite direction, and gold surged sharply at one point.

This combination of price action is extremely rare. According to JPMorgan Chase, it is the first time since the outbreak of the Iran conflict—and only the second time this year—that energy shares and the broad market declined in sync while bonds and gold rose in sync.

JPMorgan Chase interprets this as a key shift in market trading logic: “This may prove that the market’s trading logic has moved from the inflation trade to the recession trade.” Meanwhile, the money markets adjusted their pricing in parallel. The probability of the Federal Reserve raising rates in 2026 fell from about 35% last Friday to about 20%, and the market instead re-priced expectations for moderate rate cuts within the year.

Oil prices break above $100, but Treasuries and gold strengthen in the opposite direction

Overnight, May WTI crude oil futures closed up $3.24, the first time since July 2022 that they closed above the $100 whole-dollar mark. Under the market logic of the prior few weeks, a surge in oil prices should have pushed up inflation expectations, which would then have weighed on bond prices and lifted yields.

However, Monday’s move was exactly the opposite. In the New York late session, the 10-year benchmark Treasury yield fell by 8.95 basis points and kept drifting lower throughout the day; the 2-year Treasury yield dropped by 9.22 basis points.

Gold, meanwhile, surged at one point, with gains reaching as high as 3.6%. The Federal Reserve Chair Jerome Powell’s remarks on the day were dovish, further reinforcing the market’s rate-cut expectations. The money market then adjusted pricing accordingly, lowering the probability of the Federal Reserve raising rates in 2026 from about 35% last Friday to about 20%, and instead re-pricing expectations for moderate rate cuts within the year.

This “decoupling” between bonds and oil signals that the market is shifting from fears of near-term inflation toward concerns about a mid-term economic recession.

Inflation expectations drift lower, and growth concerns rise to the surface

Even though energy prices have continued to surge, long-term inflation expectations have barely moved higher. Measured by 5-year inflation swaps, market expectations for inflation over the next 5 years have fallen by about 20 basis points from the January peak, returning to levels seen during the volatile period in April of last year.

Goldman Sachs analyst Chris Hussey pointed out that the market’s core focus this week remains the tug-of-war between growth and inflation. On the inflation side, oil, natural gas, aluminum, and related derivative prices spiral upward, threatening to seep through globally, especially into Asia. On the growth side, persistent uncertainty in the Middle East combined with energy price shocks has dimmed prospects for labor demand. Goldman’s view is that under multiple scenarios, Treasury yields will ultimately fall, long-term stock volatility will rise, and what the market faces at that time will be “fears of economic growth” rather than “persistent fears of inflation.”

Santander Asset Management’s European strategy head Francisco Simón also said that although inflation remains a hidden worry, the potential drag on growth and confidence should begin to form an offset, limiting yields from rising further. He added that the bond market is currently one of the clearest tools for pricing macro impacts amid such policy conflicts.

Fiscal stimulus expectations are already priced in; Morgan Stanley highlights the logic behind Treasury pricing

Morgan Stanley’s chief rates strategist Matthew Hornbach suggested that the U.S. interest-rate market may be increasingly reflecting an expectation: after energy-driven demand destruction, fiscal stimulus will follow. This judgment implies that the strength in the bond market is not driven purely by a risk-hedging sentiment; rather, the market is laying the groundwork in advance for the next round of policy responses.

Apollo chief economist Torsten Slok noted that there is a clear premium embedded in the current 10-year yield. Under normal expectations driven by the Federal Reserve, the 10-year yield should be around 3.9%, not the current 4.4%, implying an “excess premium” of about 55 basis points. The source of this premium may include worries about fiscal policy, quantitative tightening, a decline in overseas demand, and doubts about the Federal Reserve’s independence. Slok said: “Investors need to think carefully about what these 55 basis points really mean.”

Risk warning and disclaimer terms

There are risks in the market; investments require caution. This article does not constitute personal investment advice, nor does it consider any individual users’ special investment objectives, financial circumstances, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article align with their specific circumstances. Invest accordingly at your own risk.

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Editor-in-charge: Zhu Hunan