US stock markets closed lower overnight, dragged down by a semiconductor sell-off amid intensifying global competition worries and late-session Middle East shocks. Iran launched fresh strikes against commercial shipping vessels in the Strait of Hormuz, prompting the US Treasury Department to revoke licenses allowing Iran to sell oil globally. Brent crude surged from $72 to $76 per barrel on Tuesday, sending the US Treasury 2Y yield higher to 4.185% from 4.12%. With Brent still below $80, the 2Y yield was capped at June’s high of 4.234%.
The New York Fed’s June Survey of Consumer Expectations surprisingly reported that 1-year inflation expectations rose to 3.7% from 3.5% in May, the highest since September 2023. Consumers also expected inflation to rise to 3.3% from 3.1% over the next three years, but unchanged at 3% over the next five years. Prior to the report, New York Fed President John Williams expected headline inflation to decline alongside energy prices, confident that monetary policy was well positioned to achieve its dual mandate. While the futures market increased bets for a September Fed hike to 47.4% from Monday’s 39.4%, it remained below the 54.7% priced in a week ago. Consensus did not change its view for a negative 0.1% MoM reading in the June CPI inflation report next week. With Brent still significantly below $120, Fed Chair Kevin Warsh is unlikely to change his recent view that “inflation risks have come down” at next week’s congressional testimony.
Although the DXY Index ended overnight higher by 0.3%, it did not break Monday’s high of 101.15. USD/CAD kept to its two-week range between 1.4150 and 1.4250. EUR/USD is also back inside its 1.1360-1.1440 range, with GBP/USD holding up better above 1.33. For now, the market is keeping to the playbook that Tehran and Washington are still in a high-stakes game to gain leverage during the temporary truce, and that Tuesday’s incident would not descend back into a full-scale war. However, the incident was a reminder that the real risk remains the expiry of the interim ceasefire agreement in mid-August and the red line over transit fees in the Strait of Hormuz.
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