Oil surges on Iran standoff as yields rise, rate-hike odds rebound ahead of CPI

Stocks spent most of Monday looking for direction after Friday’s record-setting performance — the Dow lost 61 pts, the S&P gave back 4 pts, the Nasdaq lost 85 pts, the Russell fell 17 pts, the Transports gave up 140 pts BUT the Equal Weight S&P added 3 pts while the Mag 7 added 10 pts.

While it didn’t look like much — underneath the surface, the story got more interesting. Oil surged, Treasury yields rose, gold pushed higher and suddenly everyone was reminded that Friday’s weak jobs report didn’t magically make the inflation problem disappear.

The whole “bad news is good news” argument? Yeah, well – that just got tossed out the window.

Oil exploded higher — WTI surged more than 5% to settle at $82.30 while Brent jumped 5% to $87.72. Why? A direct result of the weekend drama - Iran came back to the table with a list of demands for the U.S. that included lifting sanctions, releasing frozen Iranian assets, pulling U.S. military forces away from the region AND paying war reparations.

And Trump? Well, he appears willing to let the economic pressure build rather than launch another major military strike.

And the oil market heard that loud and clear.

This morning, the situation isn’t getting any better. Oil is trading up another $1.22, or 1.5% at $83.90, after Trump announced his own list of demands on Iran — including making Iran financially responsible for past attacks, saying:

“I am likewise demanding compensation from Iran, for all of the people that they have killed and gravely wounded with their roadside bombs and many conflicts. Additionally, compensation should be paid to the families of the hundreds of thousands of innocent protestors that Iran has killed over the last 50 years.”

In other words — there is NO deal in the Gulf.

Which brings us to the bond market – because it heard the noise as well. Investors sold bonds, causing yields to rise. The TLT lost 0.9% while the TLH lost 0.7%. The 10-yr pushed up and THRU 4.7% to kiss 4.71% while the 30-yr moved right back to 5.25%.

Even the 2-yr jumped 5 bps to end the day yielding 4.24%. And that’s important because unlike the 10-yr and 30-yr - which are driven by inflation expectations, fiscal concerns and term premium - the 2-yr is much more sensitive to what investors THINK the Fed is going to do next. This morning it is up 1 bps at 4.25%,

And suddenly, traders are putting the September rate hike right back on the table.

The market-implied odds of a September hike have moved back above 50% after falling sharply following Friday’s weak jobs report. And even the prediction markets are moving - Kalshi is now pricing roughly a 45% chance of a 25 bp September hike.

Think about what happened in just 72 hours. Friday’s jobs report told the bond market the Fed may not need to hike. Monday’s oil surge reminded it that if inflation starts heating up again — the Fed may not have a choice.

But here is where it goes off the rails. A rate hike will do absolutely NOTHING to produce another barrel of oil. It won’t open the Strait of Hormuz, and it won’t solve an inflation problem being driven by a geopolitical supply shock. That problem gets solved in the Gulf - not at the Fed. And don’t think the Iranians don’t know this.

Which brings us directly to tomorrow’s CPI report. Economists expect July headline CPI to rise 0.1% m/m after falling 0.4% in June, while the y/y number is expected to come in at +3.4%, down from 3.5%.

That’s great — IF it happens. But remember - this report is looking backwards. Oil has moved sharply higher SINCE much of the July inflation data was collected. So, if energy prices remain elevated the NEXT CPI report could face even more upward pressure. And THAT is where it gets complicated for Kevy and the FOMC.

Because suddenly you have exactly the combination the Fed does NOT want:

Slower employment growth AND stubborn inflation being driven by a supply shock. Raise rates and you risk putting even more pressure on an economy already showing signs of slower employment growth. Don’t raise rates and you risk allowing inflation expectations to become unanchored if oil continues to surge.

And neither choice produces one more barrel of crude.

Now, gold. It pushed higher again on Monday, up $48 to close at $4,389. This morning it is down $30 at $4,359 as it looks for the next catalyst.

$4,500 is the next level to watch — a push up and thru that opens the door to a move towards $4,750-ish. A failure could see us test support back down at $4,160.

Eco data today is about Existing Home Sales — and they are expected to be down 1% m/m.

And while that report isn’t likely to move markets the way tomorrow’s CPI report could, it matters because housing remains one of the clearest examples of what higher long-term rates are doing to the economy.

Mortgage rates remain elevated at 6.7%; affordability remains challenged and the bond market - NOT the Fed - continues to keep financial conditions tight. Raising rates will surely send mortgage rates closer to 7%.

So today we watch oil, we watch the 2-yr, and we watch how investors position themselves ahead of tomorrow’s CPI report.

European markets are not open yet, but the tone is quiet.

US futures are relatively flat as well – but it is 3:30 am. Dow futures are down 64 pts, S&P’s down 4, Nasdaq up 5 pts while the Russell is down 5 pts.

The S&P 500 closed at 7,753 – down 4 pts. I don’t expect much today – unless, of course, we get an unexpected headline. Technically – trendline support is at 7500 with resistance somewhere between 7,900/ 8,000. I’m still in the camp that we could see another drawdown as we move into September – ahead of the mid-terms. The extent of that depends on many factors – the conflict in the Middle East is in my opinion, at the top of that agenda.

The Jackson Hole – global central bank boondoggle is only 2 weeks away. The title this year is “Financial Innovation: Implications for Payments and Policy.” Sounds like a real barn burner…. The event takes place on August 27-29. My gut says we won’t hear anything that will change the outlook on the markets.

Spaghetti puttanesca

As many of you know this dish originated in Naples and is today a staple of the Neapolitan household. It is made from tomatoes, black olives (or Kalamata Olives), capers, anchovies, onions, garlic, oregano and parsley.

Start with 3 crushed garlic cloves sautéed in olive oil for about 3 / 4 mins...do not let it burn.... next add a diced white onion and diced/minced anchovy filets and sauté for another 5 / 8 mins. - as they cook they melt away. Add one can - 28 oz - of kitchen ready crushed tomatoes.... not puree - Crushed.

Add about 1/4 of a can of water - Let simmer for 10 mins or so. Next add capers, oregano, pepper, chopped Italian parsley, and rough chopped pitted Kalamata olives or pitted black olives - whichever you prefer - but do not mix...It is one or the other.

No need to add salt as the anchovies are salty enough. If you like more bite - you can add red pepper flakes at this point.....cover and let simmer.

In the meantime - bring a pot of salted water to a rolling boil and add the spaghetti Let boil for 8 mins or until aldente. Remove and drain - keeping a mugful of the pasta water. Add ½ the mugful of water to the sauce and mix well. Now add the pasta to the sauté pan with the Puttanesca sauce - heat and stir until well coated and fragrant. If you need to add more water – do so now… Serve immediately onto warmed plates offering up grated Parmegiana cheese on the side.