Starting a war is easy; ending one is hard. That simple calculus is increasingly resonating in financial markets as the backlash from the Middle East conflict persists and evolves. The economic effects have varied, but the recent optimism that the US would remain largely insulated is fading. Markets are beginning to demand higher risk premia as compensation.The latest sign that ending the conflict will be messy and take longer than expected came on Sunday, when Iran and Israel resumed fighting—exchanging missile strikes for the first time since the April cease-fire. President Trump said he would demand that Israel not retaliate, but that effort has failed as renewed fighting continues into Monday. As the Times of Israel reports:“The Israeli military says it is prepared for at least a few more days of fighting against Iran, and potentially a full resumption of the war.”Unsurprisingly, oil prices spiked, rising 4% in early Monday trading. Crude remains below its peak since the war began on Feb. 28, but a return to pre-war prices looks unlikely anytime soon.The renewed conflict between Iran and Israel may not be shocking, nor is it likely to radically shift expectations relative to recent history. But this hydra-headed conflict has momentum on multiple fronts, suggesting that the crisis, even if it doesn’t deepen, will endure in one form or another. The macro risk, as a result, is becoming chronic rather than acute.Depending on one’s view, markets have developed either a degree of acceptance or complacency about the conflict and its macroeconomic implications. Christopher Smart, a former trade adviser and Treasury official in the Obama administration, noted last week:“With every passing day, the world is learning to live without the Gulf’s seaborne exports.”True—but that tolerance has always been precarious, built on the assumption that normalcy in the Middle East would soon return. As the crisis drags on, the logic behind that assumption weakens, and the fallout is increasingly spilling into the U.S. economy.Friday’s upbeat payrolls report is a case in point. In ordinary times, news of solid hiring for a third consecutive month would be celebrated on Wall Street. But in the current climate, good economic news is bad news for the bond market: a robust labor market suggests the Federal Reserve will face growing pressure to raise interest rates to offset the supply‑side energy shock pushing headline inflation higher.Fed funds futures still price in no change at the next several policy meetings, including the June 17 FOMC gathering, when new Fed Chair Kevin Warsh makes his public debut at the post‑meeting press conference. But the Treasury market is becoming increasingly anxious—the policy‑sensitive 2‑year yield continues to climb well above the median Fed funds rate, underscoring the bond market’s expectation that a rate hike is near.The conflict is becoming harder to end because violence is spreading across multiple fronts, major powers’ goals are diverging, and the political conditions needed for de‑escalation are eroding rather than improving.A key factor that will be difficult to minimize: Iran has discovered that controlling the world’s most important energy chokepoint gives it strategic leverage that even great‑power military pressure cannot fully neutralize. This has emboldened Tehran and reshaped regional deterrence dynamics.Markets have only partially priced in this risk, assuming that a return to normal was close at hand. Facts on the ground suggest otherwise—a reality that has yet to be fully reflected in asset prices or monetary policy.Original Post