Trump has blinked but the economic damage has been done

Is that it? The retreat, when it came as expected, sounded almost improvised. Late on Monday, 9 March 2026, Donald Trump – the same man who days earlier had spoken of unconditional surrender, of US boots on the ground, of a campaign that might last “months, not weeks” – pivoted.

Suddenly he declared that the war against Iran was “very complete, pretty much,” and said that it could be over “very soon”. He added for good measure that in order to stabilise the roiled energy markets that the US Navy would be escorting oil and LNG tankers through the Strait of Hormuz.

Markets immediately responded, breathing a sigh of relief. Brent crude, which had rocketed to nearly $120 earlier in the day, tumbled back down to around $90. Equities, which had sold off almost 2% that morning, staged an almost complete recovery. The rout in government bonds was halted. Once again, the word that was being uttered on trading desks all over the world was “Taco”, or “Trump Always Chickens Out”.

But relief is not a final resolution. Oil remains 50% higher year to date. Gas prices – while 12% lower than they were on Monday – remain 70% higher so far this year. This is likely to be inflationary, with a backdrop of a slowing US economy. As much as Trump wants out, stagflation is here.

What happened was what everyone expected

The irony was that he did exactly what most investors had spent the first week of the war expecting he would do; the Taco trade has become embedded in how markets are treating this second Trump administration. The concept of bond vigilantes is an old one; how fixed income investors can control leaders by deciding when to sell, pushing yields up, and forcing politicians into more realistic and frugal fiscal policies.

Trump now seems to be managed by equity vigilantes; as soon as global investors start selling his beloved stock market, worrying that his insanely reckless geopolitical gambles will actually affect global economic growth, he relents, chickening out and looking for an exit.

The speech Trump gave later in the afternoon was exactly this capitulation the market had expected and hoped for. He referred to the war briefly as a “short-term excursion” before pivoting to a lengthy recitation of domestic achievements. For those civilians who will suffer debilitating respiratory diseases and even cancer from the bombing of the oil depot in Tehran, or for those parents who lost daughters in the bombing of a girls’ school in Minab, there has been nothing short-term about this brutal conflict.

But for Trump the subtext was clear; he wants out. Whether or not the Middle East will let him is a different question entirely, however.

Why this changes less than Trump might hope

The operational reality on the ground, however, has not shifted because Trump simply changed his tone. Iran continues to launch drone and missile attacks across the region. Maritime traffic through the Strait of Hormuz, which averaged more than 153 ships per day before the conflict, slowed to a trickle and has not recovered. Opening it, regardless of what Trump might promise, will be a deeply complex operation.

Mohammad Bagher Ghalibaf, the speaker of Iran’s parliament, reacted accordingly. Saying his country was “not looking for a ceasefire” in bellicose comments the day after Trump said that the war would be over “very soon”, he added that “we believe that the aggressor must be punched in the mouth so that it learns its lesson and never again thinks of attacking our beloved Iran… we are determined to break the cycle of ‘war-negotiation-ceasefire and then war again’ which is Israel’s plan to consolidate its dominance”.

Furthermore, even if Gulf oil producers manage to ramp up production, the damage has been done. The oil price may have fallen sharply from its Monday peak, but at $91.50, Brent remains more than 50% higher than at the start of the year. That is not a contained energy shock. This is a supply disruption that will continue to have real economic effects.

Stagflation is here

The economic outlook in the US was already deteriorating before this conflict. Last week’s US employment report from last week was unambiguous. The economy shed 92,000 jobs in one month. The unemployment rate edged up to 4.4%. Healthcare, which has been a reliable sector of growth, has now dragged lower. The US has generated zero net new jobs since May.

Into this softening labour market, the conflict has reignited inflationary pressures. Consumer prices were already running at 2.7% before the war, far outside the Federal Reserve’s 2% target. Even so, markets had expected rate cuts through the course of this year. Now, according to CME Group data, the most likely outcome is one cut, while an 18% probability is now assigned to no cuts at all. One week ago that was a mere 8%.

The Fed, in short, faces a deteriorating economy it cannot stimulate because inflation has been kickstarted by an energy shock it did not cause and cannot control.

The strategic trap

Many economists have argued that wars are generally inconsequential for markets and the global economy. They can even be beneficial, as Israel’s genocide in Gaza has been for its economy.

This conflict is different. There is grim logic to Iran’s position that Trump and Israeli President Benjamin Netanyahu appear to have underestimated. Tehran does not need a military victory. It needs to withstand the pressure long enough, and cause enough havoc in the region with a sufficient economic cost. Iran does not need to defeat the US military, it simply needs to disrupt the US economy.

This week Trump baulked. Whether or not he will be able to extract the US from this mess even if he wants is unclear. What is more certain is that the effects of the conflict on inflation and the economy will be felt for months to come.

Trump and Netanyahu, on this one, have gone too far. The economic consequences of “Operation Epic Fury” will outlast whatever ceasefire eventually transpires. Trump may have blinked, but it could be too late. DM