Bessent is getting away with the threats against Iran in Operation Outcast

Outlook

TreasSec Bessent is getting away with it—the bond buyback so quickly denigrated and dismissed is working in the sense that the rise in yields has halted and we are seeing some pullback.

He is also getting away with the threats against Iran in Operation Outcast. The price of oil is down substantially and this time the consequences for those working with Iran are not to be shrugged off so easily. Critics point out that Russia and China are pals and arms suppliers to Iran and so far not getting named. Russia is running out of everything because of the war in Ukraine and also a Trump pal, but China is a wild card. Pres Xi and Trump are to meet next month. Maybe Trump can buy acquiescence. 

In both cases, Trump made a wise decision for once in putting Mr. Bessent on the stage. He was a bit pompous and pretend-scholarly, but the bombast was effective. We can never underestimate the power of wishful thinking. Everyone wants the Iran war to end and we know Trump is a good arm-twister. Canada was perhaps a trial run to demonstrate he is not going to chicken out this time.

Forecast

Tomorrow all eyes will be on Mr. Warsh at Jackson Hole (not to mention Nvidia earnings). Until then, we are in a holding pattern circling any of several airports. Some analysts credit the drop in oil prices, temporary though it may be, for pushing yields down. Two things: can oil prices go down further and on what grounds, or is it a short-term thing? And do bond yields return to the rising trajectory on a one-for-one basis when oil prices rise again?

Okay, the price of oil is a big influence on inflation but hardly the only factor. We worry when focus gets so pin-pointy that we miss all the rest of the things going on.

Tomorrow it’s the PCE inflation release, universally expected to be softer. Again we have to battle various versions--m/m/ q/q and y/y—but the interpretation is already out there—still over the Fed 2% target but falling. See the charts from Trading Economics.

The bond buyback and Operation Outcast may be seriously inadequate and not likely to work very well, but the markets want to believe in them. That implies a dip in risk aversion, a dollar-negative. Maybe the retracement is doomed, whatever the momentum indicators show. Watch yields.