Oil prices are moving lower, the stock market is surging, and Mortgage Bonds are higher this morning, an encouraging combination that points toward lower interest rates ahead.

Over the weekend, the U.S. and Iran announced an interim agreement to reopen the Strait of Hormuz and begin a 60-day negotiating period aimed at resolving concerns surrounding Iran’s enriched uranium program.

For the markets, the significance goes beyond diplomacy. The Strait of Hormuz is one of the world’s most important energy corridors, and any reduction in geopolitical tension helps ease concerns over oil supply disruptions and future inflation pressures.

The drop in oil prices is particularly important because energy costs ripple through nearly every corner of the economy. Lower energy prices can eventually translate into lower inflation, which is exactly what bond investors and the Federal Reserve want to see.

Attention now turns to Wednesday, when Fed Chair Kevin Warsh presides over his first Federal Reserve meeting. Most market participants expect the Fed to leave short-term rates unchanged. However, the tone of his comments will be closely scrutinized.

With progress on the Iran front, softer oil prices, and signs that inflation pressures could ease in the months ahead, the conversation may begin shifting from “How long do rates stay high?” to “When can rates start coming down?”

We’re not there yet, but for the first time in a while, the market has a reason to at least begin considering that possibility.

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