The closure of Hormuz strait is starting to become a permanent feature of global economy although it seems that everybody (apart from the United States) seems to be coming to terms with paying IRGC fees for safe transit. Nevertheless, the situation resembles that of post-Dayton Bosnia since the deal at hand managed to end the war, but failed to deliver peace and normalization. This is a fertile ground for higher energy prices, higher inflation breakevens and higher bond yields. How does that affect US macroeconomic data? Find out in this brief research piece.

A slew of macroeconomic data coming from across the Atlantic clouds the prospects of FED’s prospective interest rate hikes. The first hit came on August the 07^th when NFP print delivered a substantial downward surprise (-23k print vs. +83k consensus estimate); the print nevertheless came with a drop in the unemployment rate, however we highlight the fact that previous months were revised lower as well, by a total of -103k jobs. We still remind our readers that JOLTS are higher compared to the same time previous year, meaning that the weakness on the labour market should be traced to the supply side, not the demand side. To be more precise, government shed approximately 60k jobs in July, representing the top source of the mentioned weakness.

The second and probably the biggest hit to expectations of higher US rates came about on Wednesday with a slightly weaker CPI inflation print. Both headline and core figure came 10 basis points below readings reported on the previous month (3.4% YoY for the headline figure and 2.5% YoY for the core inflation). Bear in mind that gasoline prices were 29% higher compared to last year, however they were down by 2.9% compared to June. This sparked hopes that the worst of the energy shock might actually be behind us, although seasoned traders highlight the notion that this might be a short term relief unless traffic through Hormuz strait recovers to a sensible degree. The prospects of oil traffic in the Middle East recovering appear dim since the two principals in the conflict don’t appear to communicate much (bear in mind that we don’t know what’s going on in murky diplomatic circles), but at least the high intensity conflict is over and today marks the fourth week the US hasn’t conducted any strikes on Iran. The threats from both sides are omnipresent, but so far not a single one has been able to materialize. Should oil prices remain at the same level (this is a really big IF), it’s quite likely Kevin Warsh might get by with no interest rate hikes at all.

Finally, retail sales came much weaker than expected (-0.6% MoM vs. +0.1% MoM consensus), although we advise not to make up too much of this figure since it might be masked by the end of World Cup.

Interestingly enough, the slew of weak economic data wasn’t even nearly close to overturn the conviction of the market that the FED will deliver interest rate hikes this year – FED fund futures were pricing one and a half rate hike this year on Thursday before NFP print, which is roughly the same as this morning. Market essentially dumped these three readings into the “one off” dust bin, expecting a reversal in macroeconomic data should the Middle East conflict drag on.  Speaking about which, August 17^th marks the end of the 60-day MOU signed in Versailles between the two belligerent parties, however Iran pointed out through official channels that MOU has no fixed deadline. And oh, by the way – it never actually started anyways, since the United States ever really abided in accordance with it’s provisions. It sounds like a huge nothing burger, and it truly is; however, in order to get a sense of the direction, markets need to at least get a hint of where the current frozen conflict might be going. Currently it seems the fighting has stopped, MAGA affiliated news reels are broadcasting the idea that 4 USD/gallon gas prices are the price that needs to be paid for peace in the Middle East and Iran intransigently refuses to talk to the United States because why should they try to get a new deal when the once already negotiated hasn’t led to anything in particular.

In an environment like this German 10Y yield has been bouncing up and down between 3.10% and 3.20% since July 13^th (roughly the day Trump announced the deal with Iran is “dead”), however with a lack of high intensity conflict Brent crude futures has a problem with breaching the 90 USD/barrel resistance, the same being translated to 3.20% on German 10Y yield. Friday’s EGB sell off  seems to be born from BTP futures leading the pack and colleagues at the dealing desks point out the fear of August 17^th MOU deadline. This morning we became assured that the deadline was soft and all of the parties involved (expect Israel) lack the will to take it to the next level, albeit neither side is restraining from making what so far have been empty threats. This was sufficient to move the German 10Y yield to 3.25%, but we haven’t seen sufficient momentum on either oil, or bond sell off to keep the wheel turning. This is a blueprint of the trading regime we are living in – macro data bears very little weight, energy prices appear to be at the driver’s seat, and cross-Atlantic social media posts tend to drive CTAs to mean revert every significant move on financial markets. naturally, this can only go for so long.