The situation in the Strait of Hormuz remains uncertain, and a peace deal appears so close yet so far away. Oil prices continue to edge higher, they showed some sign of relief last Friday but climbed again Monday, after hostilities between the U.S. and Iran appeared to escalate once more. Waller’s surprisingly dovish comments last Thursday pushed market expectations of a Fed hike back to 50%, and he reiterated a data-dependent approach that is likely to be shaped by the inflation prints due this week. NFP numbers came in hot, repricing hike expectations back toward 60% and raising the stakes for the inflation prints, which will prove crucial to the Fed’s decision on the 16th of September.
Over the weekend, the U.S. struck three Iranian tankers in the vicinity of Kharg Island. The retaliatory measures come as no surprise after Iran supposedly attempted to strike a U.S. ship enforcing the blockade around the Gulf of Oman. Secretary of War Pete Hegseth commented that if Iran shoots at U.S. ships, the U.S. will destroy and sink Iranian oil tankers. The escalation comes just as we approach a U.S. market holiday (Labor Day) today, giving the Trump administration and Iran one extra day for potential escalation in the Gulf. Oil prices reacted to the rising tensions, with Brent crude now sitting at $97.70 per barrel.
With all that said, the U.S. yield curve remains driven by concerns over debt sustainability, rising oil and fuel prices, hyperscaler placements and expectations for the Fed’s future policy path. Treasury Secretary Scott Bessent tried to calm the markets by increasing the size of potential buybacks from $2bn to $4bn, emphasizing that the repurchases would aim to reduce the outstanding duration of the debt by focusing on the longer end of the yield curve. The Treasury General Account was also mentioned as a potential source of liquidity for financing buybacks.Scott Bessent is also set to announce the pace of said buybacks on Wednesday (09.09.).In the long run, sound fiscal policy will still be key to reversing the continued spiral of U.S. debt, the short-term patchwork done by the Treasury Secretary remains exactly what it is, a short-term fix without a long-term solution, one that markets remain ready to test at any moment. Fed member Waller delivered a surprisingly dovish interview last week while reiterating the Fed’s data-dependent approach. With Kevin Warsh providing little to no new information and sticking to his “no forward guidance” policy, we can expect volatility in the markets on even minor deviations in this week’s inflation prints. The 2Y Treasury sits around the 4.38% mark, with the market currently pricing in one full hike by the end of the year. The 10Y Treasury, which rose sharply during August, has since stabilized and currently sits at 4.295%.
In Europe, an ECB hike remains a sure thing, with the press conference taking center stage. It will be interesting to see the comments on second-round inflation effects, and whether the rising cost of borrowing is mentioned as a concern at all. The German 2Y now sits at around 2.95% in yield terms, with the market pricing in almost two hikes by the end of the year. As we enter another trading week, oil prices remain the main driver of Bund yields, currently sitting at 3.35% in yield terms, pushed up by the recent escalation in the Middle East and, in part, by spillovers from the U.S. and Japan.
This week brings key data crucial for the next Fed meeting on the 16th of September. August PPI numbers land on Thursday (expectations of 0.4% headline and 0.3% core MoM) and the August CPI print on Friday (expectations of 0.4% headline and 0.2% core MoM). In Europe, the ECB is set to meet on Thursday the 10th of September, with the focus on the press conference.