Weekly Espresso

Higher oil prices put fresh pressure on bond markets sending yields across the globe higher. 30-year UK gilt yields hit 5.80% their highest level since 1998 and their equivalent US government bond yields also reached their highest level since 2008. Japan’s 10-year yield hit 3% for the first time in thirty years, doubling the rate it was at when Sanae Takaichi became Prime Minister.

Yields did pull back later in the week as the rise in oil prices slowed. All the turmoil in bond markets doesn’t show much sign of slowing down…

Oil climbed above $90 a barrel over the bank holiday weekend, after the US targeted rocket launchers on Larek Island to stop the Iranians from deploying mines in the Strait of Hormuz. Economic sanctions had been the preferred approach of the US over the last month but there’s been little success at getting Iran back to the negotiating table. Iranian leaders appear prepared to drag talks out until at least after the US midterm elections in November.

Prior to the latest strikes, traffic through Hormuz had increased 30% week-on-week. Expect it to fall back again this week if tensions can’t be de-escalated…

The share price of America’s largest retailer, Walmart, fell 9% following the release of their Q2 earnings report on Wednesday. Sales grew by just 2.6%, below expectations and the slowest increase since 2020. Walmart blamed the rising price of oil as lower income US households continue to be hit hardest by inflation and the domestic repercussions from the war in Iran.

The 60-day ceasefire between the US and Iran has now expired and negotiations showed few signs of progress last week. Trump threatened to bomb Oman on Monday if it “gets in the way” by agreeing a deal with Iran over the Strait of Hormuz.

Last week’s CPI release by the Bureau of Labor Statistics showed annual US inflation cooled to 3.4% taking some pressure off the Federal Reserve to raise interest rates. The odds of a rate hike at the next meeting in September have fallen to 42%.

On Wednesday, the Treasury Department reported that the US budget deficit soared to its highest monthly level in more than five years…

US markets bounced back last week, with their leading tech index up nearly 5% – its best week since April.

Optimism around the potential reopening of the Strait of Hormuz boosted markets in general. An array of strong quarterly earnings reports bought back some confidence in potential big tech profit growth. The highlight being a 93% quarterly revenue increase at Palantir which saw the stock surge 29.5% at the beginning of the week.

However, not everyone is convinced…

Following a 9-3 vote, the Federal Reserve held interest rates for the fifth time in a row on Wednesday.

With prices rising well above the Fed’s 2% inflation target, and the ongoing situation in Iran constantly muddying the inflation picture, the Fed has been coming under increasing pressure to raise rates.

During a tough press conference, Fed Chair Kevin Warsh’s responded to questions over why the Fed didn’t hike rates saying, “we will deliver, we are focused like a laser on making sure we can do it, but the suggestion we are going to wave a magic wand is one I want to disabuse you and everyone else of.” Bond markets reacted badly to the news sending 30-year US treasury yields past 5.2% and their highest level in two decades…