MOU is DOA. The memorandum of (mis)understanding between the US and Iran is dead on arrival. Act II of the latest Gulf War is underway after a brief interlude. President Donald Trump declared today that the United States will be known as "THE GUARDIAN OF THE HORMUZ STRAIT." He announced that the US is reinstating its naval blockade on Iran and plans to enforce a 20% fee on all cargo passing through the strategic waterway to reimburse the US military for security and safety costs.
As a result, the price of oil is rebounding, and so are concerns that inflation will persist as long as the war continues (chart).
This pushed the 2-year Treasury note yield up to 4.26% and the 10-year Treasury bond yield to 4.62% (charts). Our out-of-consensus view that the FOMC might raise the federal funds rate at the July meeting received some support from these geopolitical developments and from comments by Fed Governor Christopher Waller today.
S&P 500 momentum stocks, particularly semiconductors, are pulling back because they are overextended and vulnerable to developments that might slow economic growth, such as higher oil prices and higher interest rates (chart). The SOXX ETF is down 15.5% since it peaked on June 22. Some of the money from that ETF went into software and Mag-7 ETFs, which had been lagging.
Let's have a closer look at recent developments that might keep bond and stock investors on edge over the rest of the summer:
